What is Risk Rating?

February 11, 2009

10:00 to 11:00

What is Risk?

Means danger, a peril, an uncertainty, a threat, a probability.

Is the adverse effect on profitability of distinct sources of uncertainty.

Requirements for Risk Management

All risks generate potential losses;

Risks need to be identified in order to measure, monitor and control them

Risk management requires a set of tools and techniques, management processes and organizational design to identify, monitor, measure and control them.

Risk management requires:

A set of tools and techniques, Management processes; and Organizational design

to identify, monitor, measure and control

risks.

Now, the call of the times is for RISK-BASED LENDING!

What is default?

Past due more than 90 days Bankruptcy Failure to pay the loan balance Bank estimates that the client is unlikely to pay

its obligations. Other industry-specific definitions

Analyzing & measuring risks - BRR & FRR System

Basel II recommends a two-tier rating system – one that uses BRR-Borrower Risk Rating and FRR – Facility Risk Rating.

Involves qualitative and quantitative evaluation.

A Proven Working Model: SB’s BRR System A tool to systematically assess the risk

factors involved in a business applying for a loan.

There are clear guidelines & definition of terms.

Risk assessment is made on the customer, and then a BRR rating is computed based on the assessment.

Low risk=low probability of default , while high risk = high probability of default.

SB’s Model

The BRR recommended by SBC makes use of CAMP analysis.

CAMP stands for Cash, Management, Marketing and Production.

A scale of 10 is used, where 1 means very low risks and 10 is very high risk and ripe for collection.

SB’s Model Administration:

Experience of owners / management > more than 15 years 5

>15 but not less than 5 years 3 > 5 years 0 5 Owner’s health, age & succession > 50 y/o with succession plan 5 > 50 y/o with no succession plan 3 <50 y/o with succession plan 3 w/ health concerns & succession plan 3 <50 y/o with no succession plan 0 w/ health concerns, no succession 0 5

SB BRR: Administration

Financial capacity of owners/ personal net worth Above 4x the total loans 5 Between 2.1 & 4.0 4 Between 1.0 and 2.0 2 Less than 1 0 Attitude to banks (based on CI) W/ established credit track record of at least 3 years 5 Ltd. track record w/ banks, w/no adverse finding 3 With adverse findings 0 Maximum Points 20

SB BRR: Market

Clients (concentration of sales) No client <10% of sales 7.5 1 client bet.10% to 20% of sales 4 <1 client over 10% or 1 client over 20% 2 7.5 Increase of sales (ave. of last 3 yrs.) > 10% 7.5 > 5% increase not > 10% 5 < 5% or stable 2 Decreasing sales or insufficient data 0 7.5 Maximum points / Sub-total 15.0

SB BRR: Production

Suppliers Concentration No supplier 4 No supplier more than 20% 3 1 supplier bet. 20% & 30% 2 <1 supplier over 20% or 1 supplier over 30% 1 4 Inventory No inventory/ Fast-moving invty. 4 Inventory level acceptable for type of industry 2 Slow-moving inventory/Perishable and/or high tech 0 4

SB BRR: Production

Production/service capacity and potential to increase May accommodate expanded operations 4 Just sufficient for existing market 2 Inadequate for existing market 0 4 Business location (in terms of market & supply Excellent location for type of business 3 Acceptable location for type of business 2 Poor location for type of business 0 3 Maximum Points/Sub-total 15

SB BRR: Cash

Current Ratio (excl. past due ARs and obsolete inventory) Current Ratio > 3 7.5 2 > CR < 3 5 1 < CR < 2 3 CR < 1 0 7.5 Debt-Equity Ratio (DER) DER < 50:50 7.5 50:50 < DER < 67:33 5 67:33 < DER < 75.25 3 DER < 75:25 0 7.5

SB BRR: Cash

Debt-servicing capacity DSC > 2 30 1.5 < DSC < 2 20 1 < DSC < 1.5 10

DSC < 1 0 30 Accounts receivable level

AR < 90 days 590 days < AR < 180 days 3AR > 180 days 0 5

Maximum Points/Sub-total 50 Maximum Points/Total Score 100

SB BRR

Maximum Points/Total Score 100 Bonus Point for BIR FS-Based

Evaluation 3 Final Score

Passing Attained Risk

Mark Mark Quality

Borrower Risk Rating

55-59 62 Fair

Risk

Conversion Table

BRR Description Score Risk Quality

1 Excellent >89 Very low risk

2 Strong 80-89 Low risk

3 Good 70-79 Moderate risk

4 Fair 60-69 Moderate risk

5 Acceptable 55-59 High risk

6 Marginal 50-54 High risk

7 Unsatisfactory 45-49 Very high risk

8 Substandard 40-44 Very high risk

9 Doubtful 35-39 Very high risk

10 Expected loss <35 Very high risk

Thank you!