Building a Credit Scoring System

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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.

Building a Traditional Scoring System

The building scoring system process can be split into several stages:

  1. defining aims and assumptions of the system [4]

  2. collecting data of through-the-door population (Janc & Kraska, 2001)

  3. analyzing data and defining a model (set of characteristics and their attributes)

  4. constructing scoring tables

  5. 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.

Table 5: The scoring table for the "profitability" area (normative point scale)

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")

  1. ratios ROS, ROA, ROE—based on financial statements data

  2. for a new enterprise, calculations are based on forecast results and assumptions of business plan

  3. normative values of S, A, E are fixed by the headquarters of the bank

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 in Relation to Total Score

Table 8: The score corresponding to the class of the economic-financial position

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:

  1. economic—financial position class—A-1, B-2, or C-3

  2. score of both objective and subjective factors are not less than their minima: 3 5 and 15 points, respectively

Credit Risk Class in Relation to Economic—Financial Position Class

Table 9: The score corresponding to the class of the economic-financial position and the previous credit performance

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 Example of the Estimation of the Economic-Financial Position and the Estimation of Current Credit Capacity and Credit Risk Class Using Traditional Credit-Scoring Method

Table 10: Example—The score corresponding to factors

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

Table 11: The total score corresponding to qualitative and quantitative factors
 

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:

  1. The enterprise has current credit capacity.

  2. The enterprise isn't indebted in the bank, so far.

Credit risk of the transaction is Class II.

Credit Risk Class II:

  1. Credit is allowed but on condition of collateral beyond the customer's assets.

  2. Ceiling rate of interests for working-capital credits.

  3. Intensive monitoring of the customer's position is recommended.

  4. Analysis of the financial statements—repeated quarterly.

[4]E.g., what is the difference between good and bad customer.



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Managing Data Mining Technologies in Organizations(c) Techniques and Applications
Managing Data Mining Technologies in Organizations: Techniques and Applications
ISBN: 1591400570
EAN: 2147483647
Year: 2003
Pages: 174

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