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Estimating credit risk level in a credit scoring system is based on scoring factors covered by model. Scores are defined according to normative point scales. As normative can be considered (Sierpi, 1998):
average results in a chosen branch
model values
previous results of the enterprise
Added characteristic scores make the synthetic estimation of the area. All the considered areas' estimations make the total score that defines the economic-financial position class.
The building scoring system process can be split into several stages:
defining aims and assumptions of the system [4]
collecting data of through-the-door population (Janc & Kraska, 2001)
analyzing data and defining a model (set of characteristics and their attributes)
constructing scoring tables
verification of tables.
More information on aspects of building a scoring system can be found in literature (Janc & Kraska, 2001). The scoring tables we present in Tables 5 through 11 are in use in one of the biggest Polish banks. The normatives are changed periodically.
Profitability | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
criteria | very good | good | medium | weak | bad | ||||||
current value | Pt | current value | Pt | current value | Pt | current value | Pt | current value | Pt | ||
1 | ROS | ROS > 2S | 7 | 2S>ROS>1S | 5 | 1S>ROS>0,5S | 3 | 0,5S>ROS>0 | 2 | ROS < 0 | 0 |
2 | ROA | ROA > 2A | 5 | 2A>ROA>1A | 4 | IA>ROA>0,5A | 3 | 0,5A>ROA>0 | 2 | ROA < 0 | 0 |
3 | ROE | ROE > 2E | 5 | 2E>ROE>1E | 4 | 1E>ROE>0,5E | 3 | 0,5E>ROE>0 | 2 | ROE < 0 | 0 |
Source: The authors, based on scoring methodology (one of 10 biggest Polish banks acc. to "Gazeta Bankowa") | |||||||||||
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Table 6: The scoring tables for the rest of the objective factors areas
Financial liquidity | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Criteria | Very good | good | medium | weak | bad | ||||||
Current Value | Pt | current value | Pt | current value | Pt | current value | Pt | current value | Pt | ||
1 | current ratio (CR) | x | 7 | x | 5 | x | 3 | x | 2 | x | 0 |
2 | quick ratio (QR) | x | 7 | x | 5 | x | 3 | x | 2 | x | 0 |
[a]Backing of credit repayment = (cash flow+interests)/(instalments+interests)—forecast. |
Activity | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Criteria | Very good | good | medium | weak | bad | ||||||
Current Value | Pt | current value | Pt | current value | Pt | current value | Pt | current value | Pt | ||
1 | avg. collection period | x | 4 | x | 3 | x | 2 | x | 1 | x | 0 |
2 | inventory turnover | x | 4 | x | 3 | x | 2 | x | 1 | x | 0 |
3 | total assets turnover | x | 4 | x | 3 | x | 2 | x | 1 | x | 0 |
[a]Backing of credit repayment = (cash flow+interests)/(instalments+interests)—forecast. |
Indebtedness | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
criteria | very good | good | medium | weak | bad | ||||||
current value | Pt | current value | Pt | current value | Pt | current value | Pt | current value | Pt | ||
1 | debt ratio | x | 7 | x | 5 | x | 3 | x | 2 | x | 0 |
2 | constant capital/fixed assets | x | 5 | x | 4 | x | 3 | x | 1 | x | 0 |
3 | backing credit repayment [a] | x | 5 | x | 4 | x | 2 | x | 1 | x | 0 |
[a]Backing of credit repayment = (cash flow+interests)/(instalments+interests)—forecast. |
Table 7: Subjective factors, scoring tables
Reliability of the enteroreneur | |||||
---|---|---|---|---|---|
criteria | high | good | weak | bad | |
Pt | Pt | Pt | Pt | ||
1 | reliability of an entrepreneur | 4 | 3 | 1 | 0 |
2 | previous relations with the Bank | 4 | 3 | 1 | 0 |
Market position of an enterprise | |||||
---|---|---|---|---|---|
criteria | high | good | weak | bad | |
Pt | Pt | Pt | Pt | ||
1 | sale possibilities | 4 | 3 | 1 | 0 |
2 | mark of product | 4 | 3 | 1 | 0 |
3 | Competition | 3 | 2 | 1 | 0 |
4 | customers / suppliers | 2 | 1 | 1 | 0 |
Characteristics of the industry (branch) | |||||
---|---|---|---|---|---|
criteria | high | good | weak | bad | |
Pt | Pt | Pt | Pt | ||
1 | progress level | 3 | 2 | 1 | 0 |
2 | technology | 3 | 2 | 1 | 0 |
Management competence | |||||
---|---|---|---|---|---|
criteria | high | good | weak | bad | |
Pt | Pt | Pt | Pt | ||
1 | experience and competence | 5 | 3 | 2 | 0 |
economic-financial position class | score |
---|---|
A-1 | 90 – 100 |
B-2 | 74 – 89 |
C-3 | 57 – 73 |
D-4 | 40 – 56 |
E-5 | below 40 |
Source: The authors, based on scoring methodology (one of 10 biggest Polish banks acc. to "Gazeta Bankowa") |
It is stated that current credit capacity of an enterprise is fulfilled under following conditions:
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credit risk class | previous credit performance | ||
---|---|---|---|
economic-financial position class | regular | 1 – 3 months | 3 – 6 months |
A-1 | I | II | III |
B-2 | I | II | III |
C-3 | II | III | III |
D-4 | III | III | IV |
E-5 | III | IV | IV |
Source: The authors, based on scoring methodology (one of 10 biggest Polish banks acc. to "Gazeta Bankowa") |
The enterprise | XXX | The branch | YYY |
---|---|---|---|
A | qualitative factors | ||
area / characteristic | value of the factors | score | |
I | profitability | 12 | |
1 | return on sales [ROS] | 0,69% | 5 |
2 | return on assets [ROA] | 0,51% | 3 |
3 | return on equity [ROE] | 0,80% | 4 |
II | financial liquidity | 14 | |
1 | current ratio | 2,2 | 7 |
2 | quick ratio | 1,2 | 7 |
III | activity | 8 | |
1 | avg. collection period | 28 | 3 |
2 | inventory turnover | 39 | 3 |
3 | total assets turnover | 1,3 | 2 |
IV | Indebtedness | 16 | |
1 | debt ratio | 0,2 | 7 |
2 | constant capital/ fixed assets | 2 | 5 |
3 | backing credit repayment | 1,4 | 4 |
B | quantitative factors | ||
area / characteristic | score | ||
I | reliability | 6 | |
1 | Reliability of the entepreneur | 3 | |
2 | previous relations with the Bank | 3 | |
II | market position of an enterprise | 10 | |
1 | sale level | 4 | |
2 | mark of product | 3 | |
3 | Competition | 2 | |
4 | customers / suppliers | 1 | |
III | character of the industry (branch) | 5 | |
1 | progress level | 2 | |
2 | Technology | 3 | |
IV | management competence | 2 | |
1 | experience and competence | 2 |
minimum | |||
---|---|---|---|
1 | total score for quantitative factors | 50 | 35 |
2 | total score of qualitative factors | 23 | 15 |
73 | |||
Economic-financial class | C-3 | ||
minimum score | |||
1 | quantitative factors | yes | |
2 | qualitative factors | yes |
Conclusions:
The enterprise has current credit capacity.
The enterprise isn't indebted in the bank, so far.
Credit risk of the transaction is Class II.
Credit Risk Class II:
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[4]E.g., what is the difference between good and bad customer.
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