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Credit Risk Assessment (CRA) Model
 

CREDIT RISK ASSESSMENT (CRA) MODEL

Introduction:

The Credit Rating Assessment [CRA] involves judgmental / subjective assessment on sensitive issues, apart from other objective financial parameters and are devised to take credit decisions and to fix pricing of the advances.

Presently the Bank is following a Credit Risk Assessment (CRA) model for all advances of Rs 25.00 lakhs and above in all segments excluding Trade, NBFC and PER.

 For the benefit of SMEs to improve performance under various parameters and achieve higher rating, the details of CRA are placed on Website.

 The CRA model reckons various parameters as mentioned below for arriving the scoring to rate the borrower in various grades from SBH 1 / SBHTL 1 to SBH 8 / SBHTL 8.

 The Pricing or Rate of Interest to be charged will be linked to the credit rating.

Bank will not entertain any new proposal whose credit rating is SBH.4/SBH.TL.4 [i.e. hurdle rate] or below:

 A.      FINANCIAL RISK:

 (a) 1. Static Ratios – Working Capital                    

Sl. No.

Ratios

Maximum

Score

(i)

Current Ratio      

5

(ii)

TOL/TNW   

5

(iii)

PAT/Net Sales (%)        

      10

(iv)

PBDIT/Intt.

5

(v)

Return on Capital Employed (ROCE) (%)

5

(vi)

Inventory/Net Sales + Receivables/Gross Sales (Days)

5

(vii)

Trends in Performance

3

Total Marks

      38

 (a) 2. Static Ratios – Term Loan         

Sl. No.

Ratios

Maximum

Score

(i)

Project Debt / Equity   

5

(ii)

TOL/TNW   

5

(iii)

Gross Average DSCR of the project        

5

(iv)

Gross Average DSCR of all Loans

5

(v)

Terms of Repayment

5

Total Marks

        25

 The other risks for term loans would be rationalized as under:

           Financial Risk [FR]                      25

Business Risk [BR]                    25

Industry Risk [IR]                      10

Management Risk [MR]           40

Total                                       100

 (b) Future Prospects:              

Sl.No.

Parameters

Maximum

Score

(i)

Projected Profitability

 3

(ii)

Non-Achievement of Projected Profitability [score ( -)3]

-3

Total Marks

 3

 (c) Risk Mitigation: Collateral Security/Financial Standing: 

Sl.No.

Parameters

Maximum

Score

(i)

Collateral Security/Financial Standing

6

Total Marks

6

 B.        BUSINESS RISK:  

Sl. No.

Parameters

Maximum

Score

(i)

Technology

4

(ii)

Capacity Utilization vs Break Even Point

2

(iii)

Compliance of Environment Regulations

2

(iv)

User / Product Profile

2

(v)

Consistency in Quality

4

(vi)

Distribution Network

2

(vii)

Consistency of Cash Flows

4

Total Marks

        20

C.                INDUSTRY RISK: 

Sl. No.

Parameters

Maximum

Score

(i)

Competition

2

(ii)

Cyclicality/Industry Outlook

2

(iii)

Regulatory Risk

2

(iv)

Contemporary Issues like WTO, etc.

2

Total Marks

8

D.        MANAGEMENT RISK: 

Sl.No.

Parameters

Maximum

Score

(i)

Integrity : sole proprietary firm/ partnership firm/ Private Ltd. Companies                          Or

Integrity (for  Corporates) :  Corporate Governance

3

(ii)

Track Record

3

(iii)

Managerial Competence/ Commitment

3

(iv)

Expertise

2

(v)

Structure & Systems

2

(vi)

Experience in the Industry

2

(vii)

Credibility: Ability to meet Sales Projections

2

(viii)

Credibility: Ability to meet Profit (PAT) Projections

2

(ix)

Payment Record

2

(x)

Strategic Initiatives

2

(xi)

Length of Relationship with the bank

2

Total Marks

        25

E.      QUALITATIVE   FACTORS:    NEGATIVE PARAMETER 

Sl.No.

Parameters

Maximum

Score

(i)

Marks under Qualitative Factors

(-) 10

Total Marks

(-) 10

F.       SUMMARY

Risk Category                                    Sub-Total Score          Total Score                                                                           

(i)       Financial Risk  

a) Static Ratios                                          38               

b) Future Prospects                                     3                         47

           c) Risk Mitigation: Collateral                         6

                Security/Financial Standing

(ii)                Business Risk                                   20                         20  

(iii)     Industry Risk                                                 8                           8

 (iv)    Management Risk                                         25                         25

TOTAL                                                    100                       100  

(v)     Qualitative  Factors         

          ( Negative Parameter)                               (-10)                     (-10)

SBH 4 / SBHTL 4 rating is treated as hurdle rate by the Bank.

A total of 100 marks are distributed on the parameters mentioned above (A to E). Based on the aggregate marks obtained by the borrower on the above parameters, ratings are assigned in various grades from SBH 1 / SBHTL 1  to SBH 8 / SBHTL 8. Ratings are assigned as under based on the aggregate marks arrived:

         SBH 1 / SBHTL 1 > = 90

         SBH 2 / SBHTL 2 > = 75

         SBH 3 / SBHTL 3 > = 65

         SBH 4 / SBHTL 4 > = 50

         SBH 5 / SBHTL 5 > = 45

         SBH 6 / SBHTL 6 > = 35

         SBH 7 / SBHTL 7 > = 25

         SBH 8 / SBHTL 8 <    25

 

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