Credit risk management in Banks A case study

Basel Accord has classified risks in to three categories Credit risk, Market risk and Operational 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 credit risk measurement whereby a borrower is to be rated by approved credit rating agency for taking lending decisions. Punjab National Bank has developed an assessment model for the purpose of risk ratings of its borrowers known as PNB TRAC. It has categorized its borrowers as Large corporate borrowers, mid corporate borrowers, small loans, NBFC, New project rating models and Entrepreneur new Business model for rating purpose and has the rating scales starting from PNB- D to PNB AAA as follows Score obtained Above 80 77.50-80.00 72.50-77.50 70.00-72.50 67.50-70.00 62.50-67.50 60.00-62.50 57.50-60.00 52.50-57.50 50.00-52.50 47.50-50.00 42.50-47.50 40.00-42.50 30.00-40.00 30.00 & below Rating AAA AA+ AA AAA+ A ABB+ BB BBB+ B BC D Description Minimum risk Marginal risk Modest Risk Average Risk Marginally acceptable risk High Risk Caution

Case For the purpose of illustrating the rating procedure by using PNB TRAC Entrepreneur new business model is selected. Borrower is a Private Ltd company locally providing It services. PNB TRACs evaluation criteria includes Management evaluation, Business evaluation, Financial evaluation Both objective and subjective and also key risk factor. The evaluation is reported as follows

Credit Risk Rating Report For Entrepreneur New Business Model

1. Name of the Borrower: 2. Address 3. Constitution 4. Industry 5. Activity 6. Balance sheet as on date 7. Borrower Code 8. Rating Id 9. Exposure 10. Draft No:1 I) II) Sanctioned limits Proposed Limits

Management evaluation (Score 0-4) Parameters Managerial capabilities Commitment & sincerity Financial flexibility/ family Group support Track record in Debt Repayment Relationship with Bank N.A Good relation Maintained so far 3.00 Family Support 3.00 Comment Capable of efficient management Sincere and Trust worthy Rate 2.00 3.00

Business Evaluation Service sector (Score 0-4) Parameters Location of unit Marketing service Core competency Comments Near to branch in the city Easily marketable One promoter is highly qualified In the field Infrastructure Available Necessary infrastructure now made Available Quality Others 3.00 2.50 Rate 3.00 2.50

Good quality of service maintained 2.50 NA

Financial Evaluation Objective Cos parameters value TOL: 1.34 TNW Current 3.87 ratio ROCE% Inventory &Drs 0.00 holding in months Repayment 5.00 period DSCR 2.17 (Avg) 1.50 1.75 2.25 2.50 6-5.5 1.255.5-5 1.505-4 1.754-3 2.25>=2.50 2.84 <=3 2.00 5-4.50 4.50-4 4-3 3-2 <=2 4.00 14.29% 1.15 4-7% 1.35 7-10% 1.75 10-13% 2.00 13-16% 4.50 1.003.25 1.151.75 1.351.00 1.75>=2.00 >=16% 4.00 3.43 5.004.503.251.75<=1.00 3.55 0-1 1-2 2-3 3-4 4 Rate

Financial Evaluation subjective Parameters Comments Rate 2.50

Reliability of data submitted/ Reasonably reliable Reputation of appraiser / Impairment in value of assets Conduct of A/C NA

Total Score Sl.no Parameters Max.score Score Weight Weighted

1 2. 3.

Management 100 Business 100 Financial 100

obtained 68.00 67.50 70.42

40 35 25

Score 27.20 23.63 17.61 65

Credit Risk Rating (Maximum Ceiling on Total Score is applied) PNB A

Source: PNB Branch Data