Bank SBI Botswana Ltd
Credit Risk Assessment Models
2016
______
1. Salient features of SBI’s CRA models
i. The SBI Model has Two Dimensional Structure for Risk Rating – Borrower Rating and Facility Rating. A Counterparty would thus have one Borrower Rating and several Facility Ratings. The Rating Scale has been expanded to 16 Grades (SB1 to SB16). Facility Ratings would also range from FR1 to FR 16.
ii. The new CRA Models will be applicable to all accounts with Aggregate Exposure (Fund Based + Non Fund-Based) of INR 2.50 mil. & above, for both Non-Trading Sector and Trading Sector (including Services). While accounts with exposures above INR 50 mil will be covered under Regular Model, those with exposures up to INR 50 mil will be covered under the Simplified Model.
2. Major changes proposed by SBI Botswana Ltd vis-a-vis the SBI Models
i. Considering the nature of the Botswana Business and Banking Scenario, viz. Local market realities, individual owned proprietary companies (dominant part of domestic credit exposure), late filing of Annual returns and Reports, inadequate disclosures in Annual Reports, inadequate market information on industry/business segments, non insistence of auditing of accounts etc., we are unable to adopt the Regular Model of SBI, which leaves the Simplified Version to be adopted with suitable modifications.
ii. While SBI’s simplified version is applicable to all FB+NFB exposures of INR.2.5 mil. to INR 50 mil., we propose to apply the models for limits (FB+NFB) of BWP 2 mil. (14 mil INR) and above.
iii. Borrower rating alone may be assessed and facility wise rating will not apply, considering the local practice of fungible credit facilities within the overall exposure limit.
iv. While the borrower will be risk rated on the broad parameters of Trading and Non-Trading simplified CRA models of SBI, the following deviations are proposed:-
a. The basic parameters of financial risk will apply but the moving average for the last 3 years will not be scored as it is found complicated/ not available for the domestic operations.
b. Parameter of `Future Prospects-Projected Ratios’ has been replaced with `parameter of collateral security’ for the reason that future projections are not available in a vast majority of cases and the local banking practice is to rely on tangible security.
c. Parameter of `External Rating’ has not been used in the proposed models as none of the companies in the domestic market are rated by External Rating Agencies. There are also no domestic rating agencies in the country.
3. New rating Scales – 16 Rating Grades
S.No. / Borrower Rating / Range of Scores / Risk Level1 / BSBIBL 1 / 94-100 / Virtually Zero risk
2 / SBIBL 2 / 90-93 / Lowest Risk
3 / SBIBL 3 / 86-89 / Lower Risk
4 / SBIBL 4 / 81-85 / Low Risk
5 / SBIBL 5 / 76-80 / Moderate Risk with Adequate Cushion
6 / SBIBL 6 / 70-75 / Moderate Risk
7 / SBIBL 7 / 64-69
8 / SBIBL 8 / 57-63 / Average Risk
9 / SBIBL 9 / 50-56
10 / SBIBL 10 / 45-49 / Acceptable Risk
11 / SBIBL 11 / 40-44 / Borderline risk
(Risk Tolerance Threshold)
12 / SBIBL 12 / 35-39 / High Risk
13 / SBIBL 13 / 30-34 / Higher Risk
14 / SBIBL 14 / 25-29 / Substantial risk
15 / SBIBL 15 / <24 / Pre-Default Risk (extremely vulnerable to default)
16 / SBIBL 16 / - / Default Grade
4. Hurdle Scores
We propose the following hurdle scores in the proposed CRA as under:
Risk Types / Existing Company / NewCompany
Financial Risk (FR) / 25/60 / 15/30
Business & Industry Risk (B&IR) [Business Risk (BR) for trade] / 10/20 / 15/30
Management Risk (MR) / 10/20 / 18/40
Aggregate hurdle Score / 45/100 / 48/100
Overall Hurdle Grade# / SBIBL 10 / SBIBL 10
Score range 45-48 corresponds to SBIBL 10 and hurdle score will be SBIBL 10. Any new exposure / enhancement will be considered only with the approval of the Managing Director, where after the proposal will be submitted to the respective committees for sanction.
5. Frequency of Rating : Annual
6. Normalization
Under the Risk rating model for both Trading and Non-Trading Sectors, there can be a situation where one of the risk parameters will not be applicable to a particular customer e.g, Average DSCR may not be applicable to a customer enjoying only Working Capital Limits but no loan. In such cases, the scores will be normalized.
7. Term Loans
The Risk Rating Models do not address a situation where a customer approaches the bank for term loan alone without the need for working capital e.g., real estate loans for commercial or residential complexes for sale or rental. We propose to adopt the same model as approved earlier. The model with explanations to risk parameters is annexed at C (Annexure C1 to C5).
8. Country Risk:
Country risk is the risk that a borrower will not be able to service its obligations to pay because of cross border restrictions on the convertibility or availability of a given currency. It is also an assessment of the political and economic risk of the country. Country risk is assumed to exist when 25% or more of the borrower’s cash flow or assets are located outside Botswana. Country Risk Ratings are circulated by International Banking Group of State Bank of India.
8.1 Country Risk Assessment- Applicability:
a) Country Risk would be applicable to units having 25% or more of cash flows/Assets to countries starting from Medium Risk.
b) If entire such exports fall under single category from ‘Medium Risk’ category to any of the ‘Higher Risk’ Categories, Borrower Rating would undergo a downgrade as per the table below.
c) In case of unit having aggregate exports of 25% or more (of sales) to various countries (under 4 categories of ‘Medium’ to ‘Higher’ Risk i.e. Medium Risk/ High Risk and under caution/ Very High Risk and under caution/ off credit, Restricted and under caution), two categories would be identified which contribute maximum of such exports and rating would be arrived for those two categories based on table provided below. In such case the lower of the two ratings as arrived above would be Final Borrower rating of the Company. However, for a country to be included in the above calculation, a minimum 5% export criteria would be applied. For example, if a unit has a total of 26% exports to risky countries, comprising of 23% to “High risk and under caution” and 3% to “off credit, restricted and under caution”, then as per lower of the two rating rule, downgrade corresponding to “Off credit, Restricted and under caution” should be applied. However, since export to this category is 3% i.e. less than 5%, this would be ignored and downgrade corresponding to “High risk and under caution” would be applicable.
d) Exports against advance payment would not be taken into consideration for Country Risk Rating. Further, in cases where Risk arising out of exports to ‘Medium Risk’ to ‘Higher Risk’ category countries is mitigated by a L/C from a first class Bank recognised by SBI, the Country Risk Rating would not be applicable. However, such details of exposure alongwith the type of risk mitigation available will have to be explicitly indicated in the CRA assessment Sheet for validation by the CRA validating Authority.
8.2 Change in Rating Based on Risk Category of Country*
Sr / Country Ratings / Cash Flows/Exports/Assets Classified under different Categories / Mitigations, Advance Payments/LC from First Class Bank/ECGC Cover / Net Country Exposure / Change in CRA Rating /a / b / c / D=b-c / e
1 / Insignificant Risk / NIL
2 / Very Low Risk / NIL
3 / Low Risk / NIL
4 / Low Medium Risk / NIL
5 / Medium Risk / NIL
6 / Medium Risk but under caution / Down by 1 Stage
7 / High Risk and under caution / Down by 2 stage
8 / Very high risk and under caution / Down by 3 stage
9 / Off Credit/ Restricted and under caution / Down by 4 stage
Total from Medium Risk to off Credit/ Restricted & under caution (5 to 10) / XXX / YYY / ZZZ
* Latest Country Ratings are circulated by IBG of SBI are given in annexure and will be updated from time to time.
a) Final CRA Rating after country Risk would be determined as indicated in following example:
Risk Categories / CRA Rating before downgrade / Corresponding Downgrade / CRA Rating after Downgrade / Final CRA Rating after country Risk (Lower of SBIBL8/SBIBL9)Medium Risk / SBIBL-8 / NIL / SBIBL-8 / SBIBL-9
Medium Risk but under caution / SBIBL-8 / Down by stage 1 / SBIBL-9
#If the Borrower rating undergoes a downgrade of 2 more stages on account of country risk, the sanction would be required to be obtained from the Board of Directors.
9. Risk Score –Rating transition Matrix- : Risk Score-Rating transition matrix will be worked out as under:
Year 1 / Year 2 / Year 3Aggregate Risk Score / CRA Rating / Aggregate Risk Score / CRA Rating / Aggregate Risk Score / CRA Rating
Comparision of latest Financial Risk (FR) Score of last 3 Years
Year 1
Financial Risk Score / Year 2
Financial Risk Score / Year 3
Financial Risk Score
a) Comments on the Movement of Rating / Risk Scores to be furnished. A major fluctuation in scores resulting in upgradation or deterioration in rating by more than one stage, is to be commented upon.
b) Upgradation in rating only on account of higher score in parameters other than Financial Risk, is to be examined thoroughly and commented upon.
10. Appendices and Annexures
i. Trading Sector Model
Appendix A / Borrower Rating SummaryAnnexure A1 / Financial Risk
Annexure A2 / Qualitative Factors
Annexure A3 / Value Statements-Business Risk
Annexure A4 / Value Statement-Management Risk
ii. Non-Trading Model
Appendix B / Borrower Rating SummaryAnnexure B1 / Financial Risk
Annexure B2 / Qualitative Factors
Annexure B3 / Value Statements-Business & Industry Risk
Annexure B4 / Value Statement-Management Risk
iii. Term Loan Model –Stand Alone
Appendix C / Borrower Rating SummaryAnnexure C1 / Financial Risk
Annexure C2 / Industry/Business Risk
Annexure C3 / Value Statements-Management Risk
Annexure C4 / Collateral Security
Annexure C5 / Positive Aspects
iv. Annexure D: Country Risk Ratings
APPENDIX A
TRADING SECTOR : SIMPLIFIED MODEL
BORROWER RATING SUMMARY
(A) / Financial Risk (FR) / Marks(a) / Weight
(b) / Maximum Weighted Score
(a) x(b)
( c ) / Company’s
Weighted Score
(d)
Parameters
(i) / TOL/ TNW / 10 / 2 / 20
(ii) / Current Ratio / 10 / 2 / 20
(iii) / Return on Capital Employed (ROCE) (%) / 10 / 1 / 10
(iv) / PBDIT/Intt. / 10 / 1 / 10
(v) / PAT/Operating income / 10 / 1 / 10
(vi) / (a) Gross Average DSCR (for TL)
or
(b) Inventory/Net Sales + Receivables/Gross Sales (Days) – (WC)
or
(c) [ Sum of Scores under (A+B)]/2
(for a company enjoying both WC & TL facilities) / 10 / 2 / 20
(vii) / Group Risk / 10 / 0.5 / 5
(vii) / Collateral Security / 10 / 2 / 20
(viii) / Forex Risk / 10 / 0.5 / 5
Total Score (Annexure A1) / 120
Total Score normalised to 60 (Existing Unit) / 120/2=60
Total Score normalised to 30 (New Unit) / 120/4=30
Qualitative Factors (-ve)- (Annexure A2) / (-10) / 1 / (-10)
Total Score (FR) / 60
( B ) / Business Risk (BR)
S. No. / Parameters / Maximum
Score / Company’s Score
(i) / Competition & Market Risk / 8
(ii) / Outlook/Cyclicality / 6
(iii) / Technology / 2
(vi) / Business Environment / 2
(vii) / Regulatory Risk / 2
Total Score (BR)- (Annexure A3) / 20
(For New Unit To be normalised to 30) / 20*1.5=30
(C) / Management Risk (MR)
(i) / Integrity / 4
(ii) / Track Record/Conduct of Account / 4
(iii) / Expertise, Managerial Competence & Commitment / 3
(iv) / Payment Record / 2
(v) / Structure & Systems / 1
(vi) / Experience in the Trade / 2
(vii) / Length of Relationship with the Bank / 3
(viii) / Succession Plan/Key Person / 1
Total Score (MR) – (Annexure A4) / 20
(For New Unit To be normalised to 40) / 20*2=40
(D) / Aggregate Risk Score :(FR + BR + MR) : (A+B+C) ~ [60 + 20 + 20] (Existing Unit) / 100
(E) / Aggregate Risk Score :(FR + BR + MR) : (A+B+C) ~ [30 + 30 + 40] (New Unit)
(F) / CRA Rating Based on the above Score
(G) / Country risk assessment
(H) / Final Borrower Rating after Country risk Assesment
(I) / Financial Statement Quality / Excellent/Good/
Satisfactory/Poor
(J) / Risk Score/ Rating Transition Matrix / Qualitative/ Comments
ANNEXURE-A1
SCORING BANDS
TRADING SECTOR (SIMPLIFIED MODEL) : FINANCIAL RISK
(i) TOL/ TNW (Maximum weighted score-20)
Ratio Band(a) / Marks
(b) / Weight
(c) / Company’s
Ratio
(d) / Company’s Score
from ( b )
(e) / Company’s Weighted Score = (e) x (c )
(f)
<=3.50 / 10 /
2
<=4.00 / 9
<=4.50 / 8
<=5.00 / 7
<=6.00 / 6
<=8.00 / 5
<=10.00 / 3
>10.00 / 0
(ii) CURRENT RATIO (Max. weighted score-20)
Ratio Band(a) / Marks
(b) / Weight
(c) / Company’s
Ratio
(d) / Company’s Score
from ( b )
(e) / Company’s Weighted Score = (e) x (c )
(f)
>=1.25 / 10 /
2
>=1.20 / 9
>=1.15 / 8
>=1.10 / 7
>=1.05 / 6
>=1.00 / 5
>=0.90 / 3
<0.90 / 1
(iii) RETURN ON CAPITAL EMPLOYED (ROCE) (PBDIT/TOTAL ASSETS) (Maximum weighted score-10)