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8/11/2019 Credit Risk Rating
1/3
Credit risk management in Banks A case studyBasel Accord has
classified risks in to three categoriesCredit risk, Market risk
andOperational risk. Of the three the most prominent risk is credit
risk constituting 90-95% of risk segment of Banks. RBI has approved
Standardized approach for creditrisk measurement whereby a borrower
is to be rated by approved credit rating
agency for taking lending decisions. Punjab National Bank has
developed anassessment model for the purpose of risk ratings of its
borrowers known as BANKSTRAC. It has categorized its borrowers as
Large corporate borrowers, mid corporateborrowers, small loans,
NBFC, New project rating models and Entrepreneur newBusiness model
for rating purpose and has the rating scales starting from BANKS-
Dto BANKSAAA as follows
Score obtained Rating Description
Above 80 AAA Minimum risk
77.50-80.00 AA+ Marginal risk
72.50-77.50 AA70.00-72.50 AA-
67.50-70.00 A+ Modest Risk
62.50-67.50 A
60.00-62.50 A-
57.50-60.00 BB+ Average Risk
52.50-57.50 BB
50.00-52.50 BB-
47.50-50.00 B+ Marginallyacceptable risk
42.50-47.50 B
40.00-42.50 B-
30.00-40.00 C High Risk
30.00 & below D Caution
CaseFor the purpose of illustrating the rating procedure by
using BANKS TRACEntrepreneur new business model is selected.
Borrower is a Private Ltd companylocally providing It services.
BANKS TRACs evaluation criteria includesManagement evaluation,
Business evaluation, Financial evaluationBoth objective
and subjective and also key risk factor.The evaluation is
reported as follows:-Credit Risk Rating Report For Entrepreneur New
Business Model1. Name of the Borrower:2. Address3. Constitution4.
Industry5. Activity6. Balance sheet as on date7. Borrower Code8.
Rating Id
9. Exposure10. Draft No:- I) Sanctioned limits & II)
Proposed Limits
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8/11/2019 Credit Risk Rating
2/3
Management evaluation (Score 0-4)
Parameters Comment RateManagerial capabilities Capable of
efficient management 2.00Commitment & sincerity Sincere and
Trust worthy 3.00
Financial flexibility/ familyGroup support Family Support
3.00Track record in DebtRepayment N.ARelationship with Bank Good
relation Maintained so far 3.00
Business Evaluation Service sector (Score 0-4)
Parameters Comments Rate
Location of unit Near to branch in the city 3.00
Marketing service Easily marketable 2.50
Core competency One promoter is highly qualified
In the field 2.50
Infrastructure Available Necessary infrastructure now made
Available 3.00
Quality Good quality of service maintained 2.50
Others NA
Financial Evaluation Objective
parameters Cosvalue
0-1 1-2 2-3 3-4 4 Rate
TOL:TNW
1.34 5.00-4.50
4.50-3.25
3.25-1.75
1.75-1.00
=2.00 4.00
ROCE% 14.29% 4-7% 7-10% 10-13% 13-16% >=16% 3.43
Inventory&Drsholding inmonths
0.00 5-4.50 4.50-4 4-3 3-2
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8/11/2019 Credit Risk Rating
3/3
Financial Evaluation subjective
Parameters Comments RateReliability of data submitted/
Reasonably reliable 2.50Reputation of appraiser /
Impairment in value of assetsConduct of A/C NA
Total Score
Sl.no Parameters Max.score Scoreobtained
Weight Weighted
1. Management 100 68.00 40 27.20
2. Business 100 67.50 35 23.63
3. Financial 100 70.42 25 17.61
