The main methods for assessing the creditworthiness of a borrower - an individual, used in Russian banks. How banks assess the creditworthiness of clients Methods for determining the creditworthiness of clients in world practice
- Mustafina Nailya Mugattarovna, bachelor, student
- Bashkir State Agrarian University
- FINANCIAL STABILITY
- FORECAST
- FINANCIAL RATIO
- COMMERCIAL BANK
This article talks about the importance of assessing the borrower's creditworthiness for predicting their profits and discusses the main methods for assessing the creditworthiness of commercial bank customers, analyzes in detail the assessment of the borrower's financial stability.
- Analysis of the return on capital as a factor in the effective operation of a commercial bank in Rosselkhozbank JSC
- Theoretical aspects of methods for evaluating the effectiveness of a commercial bank
- The essence of financial stability and its main factors
In the modern world, the market situation cannot be imagined without such an important component as a commercial bank. Today, banks provide a huge number of services that everyone uses.
One of the most demanded bank services is a loan, but before issuing it, the bank must assess its creditworthiness.
The creditworthiness of a commercial bank client is the ability of the borrower to fully and on time pay off his debt obligations (principal and interest). Unlike its solvency, it does not fix non-payments for the past period or for some date, but predicts the ability to repay the debt in the short term. The level of creditworthiness of the client determines the degree of risk of the bank associated with the issuance of a loan to a particular borrower.
The assessment of the creditworthiness of clients of a commercial bank is closely related to the process of planning the income and expenses of this institution, since the amount of profit received depends on the borrower's ability to meet its obligations.
To date, there are several ways to assess the creditworthiness of a bank client:
- management assessment;
- assessment of the financial stability of the client;
- cash flow analysis;
- collecting information about the client;
- monitoring the work of the client by going to the place.
Let us consider in more detail the assessment of the client's financial stability.
The assessment of the creditworthiness of large and medium-sized enterprises is based on the data of the balance sheet, income statement, loan application, information about the history of the client and his managers. The system of financial ratios, analysis of cash flow, business risk and management are used as methods for assessing creditworthiness.
The choice of financial ratios is determined by the characteristics of the bank's clientele, possible causes of financial difficulties, and the bank's credit policy. Five groups of coefficients can be distinguished:
I - liquidity;
II - efficiency, or turnover;
III - financial leverage;
IV - profitability;
V - debt service.
The current liquidity ratio (KTL) shows whether the borrower is able to pay off debt obligations: KTL = Current assets / Current liabilities.
The current liquidity ratio involves a comparison of current assets, i.e. funds that the client has in various forms (cash, net receivables of the nearest maturity, the value of inventories of inventory and other assets), with current liabilities, i.e. liabilities of the nearest maturity (loans, debt to suppliers, bills, budget, workers and employees). If the debt obligations exceed the funds of the client, the latter is insolvent.
Quick (operational) liquidity ratio (KBL) is calculated as follows: KBL = Liquid assets / Current liabilities.
With the help of the quick liquidity ratio, the ability of the borrower to quickly release funds from circulation to repay the bank's debt on time is predicted.
Efficiency (turnover) ratios complement liquidity ratios and make it possible to make the conclusion more justified. If liquidity ratios are growing due to an increase in receivables and the cost of inventories while slowing down their turnover, it is impossible to upgrade the borrower's creditworthiness. The efficiency coefficients are calculated as follows (table 1).
Table 1. Formulas for calculating efficiency ratios.
inventory turnover |
|
Name |
|
Turnaround time in days |
Average inventory balances in the period / One-day sales revenue |
The number of revolutions in the period |
Sales revenue for the period / Average inventory balances in the period |
Accounts receivable turnover in days |
Average debt balances in the period / One-day sales proceeds |
Turnover of fixed capital (fixed assets) |
Sales proceeds / Average residual value of fixed assets in the period |
Asset turnover |
Sales proceeds / Average assets in the period |
Efficiency coefficients are analyzed in dynamics and compared with the coefficients of competing enterprises and with industry averages.
The financial leverage ratio characterizes the degree of the borrower's equity. The options for calculating this coefficient are different, but the economic meaning is the same: an assessment of the amount of equity and the degree of dependence of the client on attracted resources. When calculating this ratio, all debt obligations of the bank's client are taken into account, regardless of their terms. The higher the share of borrowed funds (short-term and long-term), the lower the client's creditworthiness class. The final conclusion is made taking into account the dynamics of profitability ratios.
The profitability ratios characterize the efficiency of the use of all capital, including its attracted part. Their varieties are presented in tables 2 and 3.
Table 2. Formulas for calculating the coefficients of the rate of return and profitability.
Rate of return ratios |
|
Gross profit before interest and taxes / Sales revenue or net sales |
|
Net operating profit (earnings after interest but before taxes) / Sales revenue or net sales |
|
Net income after interest and taxes / Sales proceeds or net sales |
|
Profitability ratios |
|
Earnings before interest and taxes / Assets or equity |
|
Earnings after interest but before taxes / Assets or equity |
|
Net income (earnings after interest and taxes) / Assets or equity |
|
A comparison of three types of profitability ratios shows the degree of influence of interest and taxes on the profitability of an enterprise.
Table 3. Formulas for calculating the rate of return per share.
If the share of profit in sales proceeds grows, profitability of assets or capital increases, then it is possible not to lower the client's rating even if the financial leverage ratio worsens.
Debt service ratios (market ratios) show how much of the profit is absorbed by interest and fixed payments. The formulas for their calculation are given in Table 4.
Table 4. Formulas for calculating debt service ratios.
The methodology for determining the numerator of interest coverage ratios and fixed payment coverage depends on whether interest or fixed payments are included in the cost price or paid out of profit.
Debt service ratios are of particular importance at high inflation rates, when the amount of interest paid may approach or exceed the principal debt of the client. The more profit is used to cover the interest paid and other fixed payments, the less it remains to repay debt obligations and cover risks, and the worse the client's creditworthiness.
Financial ratios for assessing creditworthiness are calculated on the basis of forecast values for the planned period, average balances on balance sheets as of reporting dates. Indicators for the 1st number do not always reflect the real state of affairs. Therefore, in world practice, a system of coefficients is used, calculated on the basis of the results account (it contains the reporting indicators of turnover for the period). The initial turnover indicator is the sales proceeds.
To determine creditworthiness, a more detailed additional analysis can be carried out, coefficients of business activity, financial stability, profitability, etc. can be calculated.
With enterprises-borrowers of each class, banks build their relations in different ways.
First-class borrowers can count on opening a credit line, lending on a checking account, issuing one-off blank loans - with the establishment in all cases of a lower credit rate than for all other borrowers.
Lending to second-class borrowers is carried out in a general manner, i.e. in the presence of appropriate forms of security. The interest rate depends on the type of collateral.
The provision of loans to third-class borrowers is associated with high credit risk for the bank. In most cases, they try not to issue loans to such borrowers. In the case of issuance - special attention to security, and the interest rate is at the highest level.
Huge non-payments in the country were associated with an underestimation of the moments of credit risks, with the uncivilized approach of banks at the beginning of the development of market relations to their credit policy. When considering the economic situation of a potential borrower, literally all moments are important, otherwise the bank may suffer huge losses. Credit departments of the bank must constantly take into account, analyze foreign and ever-increasing Russian experience.
Analysis and assessment of the borrower's creditworthiness is necessary in order to decide whether it is worth giving him a loan and, if so, on what conditions: the amount provided by the bank, term, interest rate, interest payment schedule, the need for collateral for it, etc. . Having made all the necessary calculations and conclusions on them, a commercial bank will be able to make a forecast about how much money it needs to issue, how many monetary units it needs to create a reserve. Thus, having assessed the creditworthiness of the borrower, the bank plans the volume of lending for the future.
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In modern economic conditions, the financial sector, including such a component as credit institutions (banks), is the most important infrastructural element that contributes to the strengthening and comprehensive development of a market economy.
Macroeconomic instability in the country has a negative impact on the banking system. At the same time, lending, which in most cases brings the main share of income to banks, also generates an increased risk of such activities. That is why the problem of economic analysis of the borrower's creditworthiness is of particular importance in the process of creating the necessary conditions for the implementation of plans for the dynamic development of industry and the achievement of sustainable growth rates for the entire Russian economy.
Assessment of the creditworthiness of potential borrowers is one of the most complex and responsible tasks in the activities of a commercial bank. An effective organization of the creditworthiness assessment process allows, firstly, to reduce the level of bank credit risks, and secondly, to create the necessary conditions for high-quality servicing of bank customers who demand credit products. The relevance of this task can hardly be overestimated, since the increasing demand for credit products from enterprises of various sectors of the national economy and the growing competition in the banking services market caused by the expansion of foreign credit institutions to the Russian credit market requires banks to improve their creditworthiness assessment mechanisms in order to improve the quality of customer service and while minimizing credit risks.
In the first chapter of my course work, I would like to dwell on the definition of the theoretical aspects of assessing the creditworthiness of a borrower by a commercial bank. In particular, it assesses the existing approaches to the definition of the concept of "creditworthiness", highlights the goals and objectives of assessing the creditworthiness of the bank, considers the criteria for the creditworthiness of the client, conducts a comparative assessment of domestic and foreign approaches to assessing the creditworthiness of borrowers, and provides a description of information sources for the purposes of analysis and assessment of creditworthiness. borrower.
The second chapter presents directly the system for assessing the creditworthiness of various types of clients of a commercial bank, that is, it considers the assessment of the creditworthiness of large, medium and small enterprises, and also outlines the features of assessing the creditworthiness of individuals.
In the modern Russian economy, in the period of formation and development of a new type of economic relations, when economic entities are independent in choosing most of the decisions they make, the question of the need to develop an effective capital management program is of paramount importance.
The equity capital of an organization is not yet a guarantee of profit. However, even if it exists, this does not mean that it will be sufficient for investment in the development of production, replenishment of current assets, etc. Own financial resources are the basis for the stable operation of the organization, but at the same time they are rather inactive resources and it is risky to consider them as a long-term source of financing for the expanded reproduction of fixed assets and intangible assets or a source of replenishment of current assets. As a result, an alternative source of financing is borrowed capital.
In the conditions of the formation and development of market relations, creditors need to have an accurate idea of the creditworthiness of their partner. To achieve this goal, commercial banks are developing their own methods for determining creditworthiness. However, for this it is necessary to clearly define what this concept, which is characteristic of a market economy, includes. The process of transition to market relations has significantly changed the relationship between organizations and their creditors. The terms of mutually beneficial partnership and common economic interest, directly related to the creditworthiness of the borrower, came to the fore.
Creditworthiness is the ability of the borrower to fully and on time pay off its debt obligations (principal and interest). It can also be noted that the financial condition of an enterprise is expressed by its solvency and creditworthiness, i. the ability to timely satisfy payment requirements in accordance with business contracts, repay loans, pay wages to workers and employees, make payments and taxes to the budget.
The above definitions are not entirely correct, since they do not distinguish between the terms "creditworthiness" and "solvency". The latter just implies the ability of the organization to pay off all types of obligations, and creditworthiness implies the ability to pay off only credit obligations. Solvency is the ability to satisfy the requirements of creditors at the moment, and creditworthiness is a forecast of such ability for the future. And there is another significant difference. The organization repays its usual obligations (except for debt on loans), as a rule, at the expense of proceeds from the sale of products (works, services). The repayment of the loan can be carried out both from the borrower's own funds, and at the expense of funds received by the bank from the sale of the security pledged, the funds of the guarantor or guarantor, and insurance indemnities. In addition, creditworthiness is determined not only by the liquidity of the organization's assets used to pay off liabilities, but also by many other factors that do not directly depend on the business entity (counterparties, sales markets, etc.) and are not always quantifiable.
There is also an approach to the definition of creditworthiness, linking it with solvency, however, given the above, depending on the goals of the analysis, they can be considered as different concepts. It can be noted that the concept of creditworthiness is the ability of the borrower to repay only the loan debt, and hence it follows that the characteristic of creditworthiness should be different from solvency, since, in accordance with the principles of lending, borrowed funds can be repaid both at the expense of revenue from the main activity and at the expense of secondary sources of collateral (realization of collateral, recovery from the guarantor).
At the same time, several basic conditions are taken into account in assessing creditworthiness: the structure of capital used and financial stability; assessment of manufactured products in terms of demand for it under the prevailing market conditions; liquidity of the company's assets. It should be emphasized that the creditworthiness of an economic entity is not limited to the above conditions, but is much broader and includes many other conditions, for example, the requirement for the level of profitability of activities, the turnover of various types of assets, return on investment, the quality of the organization's management, the content of credit history.
When interpreting the term "creditworthiness of the borrower", as a rule, a complex of certain factors is taken into account, including: the capacity and legal capacity of the borrower to complete a credit transaction; his business reputation; availability of collateral; the ability of the borrower to earn income - to generate cash flows.
The problem of assessing the borrower's creditworthiness and the term "creditworthiness" itself were studied and developed at different times. Issues of creditworthiness were quite relevant and covered in the economic literature of the pre-revolutionary period and in the works of economists of the 20s of the XX century; interest in them has increased since the late 80s, at the beginning of economic reforms in the country. During the period of the NEP, economists generally understood creditworthiness, from the borrower's point of view, as the ability to make a credit transaction, the possibility of timely repayment of a loan received; from the position of the bank - the correct determination of the size of the allowable loan. During the development of market relations, special attention began to be paid to the liquidity of the borrower's assets. Therefore, an analysis of changes in approaches to the definition of the concept of "creditworthiness" suggests that it is subject to the influence of the developing economic environment for the functioning of the lender and the borrower.
So, creditworthiness of the borrower (economic entity)- its complex legal and financial characteristics, represented by financial and non-financial indicators, allowing to assess its ability in the future to fully and within the time period stipulated in the loan agreement, pay off its debt obligations to the creditor, as well as determining the degree of risk of the bank when lending to a particular borrower.
The creditworthiness of the borrower depends on many factors, each of which must be assessed and studied. A significant and very difficult problem for an analyst is to determine the change in all factors, causes and circumstances that affect creditworthiness in the future. That's why goal analysis of the borrower's creditworthiness consists in a comprehensive study of its activities for a reasonable assessment of the possibility of returning the resources provided to it and involves the solution of the following tasks :
· substantiation of the optimal amount of financial resources provided by the creditor and methods of their repayment;
Determining the efficiency of the borrower's use of credit resources;
· implementation of the current assessment of the financial condition of the borrower and forecasting its changes after the provision of credit resources;
· current control (monitoring) by the lender over the observance by the borrower of the requirements in relation to indicators of its financial condition;
· analysis of the feasibility and effectiveness of decisions made by management to achieve and maintain an acceptable level of creditworthiness of the borrowing organization;
Identification of credit risk factors and assessment of their impact on decision-making on issuing a loan to a borrower;
· analysis of sufficiency and reliability of security provided by the borrower .
World and domestic banking practice has made it possible to highlight customer credit criteria: the nature of the client, the ability to borrow funds, the ability to earn funds in the course of current activities to repay the debt (financial capacity), capital, loan collateral, the conditions under which the loan transaction is made, control (legislative basis for the borrower's activity, compliance of the nature of the loan with the standards of the bank and authorities supervision).
Under the character of the client is understood as its reputation as a legal entity and the reputation of managers, the degree of responsibility of the client for debt repayment, the clarity of his idea of the purpose of the loan, compliance with its credit policy of the bank. The client's reputation as a legal entity consists of the duration of its operation in this area, the compliance of economic indicators with industry averages, its credit history, and the reputation in the business world of its partners (suppliers, buyers, creditors).
Ability to borrow funds means that a representative of an enterprise or firms has certain powers, reaching the age of majority or other signs of the borrower's legal capacity - an individual. The signing of an agreement by an unauthorized or incompetent person means a high probability of losses for the bank.
One of the main criteria for a client's creditworthiness is his the ability to earn funds to pay off the debt in the course of current activities. Another position is also known, set out in the economic literature, when creditworthiness is associated with the degree of capital investment in real estate. The latter is a form of protection against the risk of depreciation of funds in the context of inflation; this cannot be the main sign of the borrower's creditworthiness. The fact is that it takes time to release money from real estate. Investing in real estate is associated with the risk of asset impairment. Therefore, it is advisable to focus on the liquidity of the balance sheet, the efficiency (profitability) of the borrower's activities, and its cash flows.
Client Capital is an equally important criterion for the creditworthiness of the client. At the same time, the following two aspects of its assessment are important: 1) its sufficiency, which is analyzed on the basis of the established requirements for the minimum level of the authorized capital (share capital) and financial leverage ratios; 2) the degree of investment of own capital in the credited operation, which indicates the distribution of risk between the bank and the borrower. The greater the equity investment, the greater the borrower's interest in carefully monitoring credit risk factors.
Under loan collateral refers to the value of the borrower's assets and a specific secondary source of debt repayment (pledge, guarantee, guarantee, insurance) provided for in the loan agreement. If the ratio of the value of assets and debt obligations is important for repaying a bank loan in the event that the borrower is declared bankrupt, then the quality of a particular secondary source guarantees that he will fulfill his obligations on time in case of financial difficulties. The quality of the collateral, the reliability of the guarantor, the guarantor and the insured are especially important in case of insufficient cash flow from the bank's client, problems with the liquidity of its balance sheet or capital adequacy.
To the conditions under which the credit operation is performed, include the current or forecast economic situation in the country, region and industry, political factors. These conditions determine the degree of the bank's external risk and are taken into account when deciding on the bank's standards for assessing cash flow, balance sheet liquidity, capital adequacy, and the level of borrower management.
The last criterion is control the legal framework for the borrower's activities and its compliance with the bank's standards, directs the banker to obtain answers to the following questions: is there a legislative and regulatory framework for the functioning of the borrower and the implementation of the financed event, how the expected change in legislation (for example, tax legislation) will affect the results of the borrower's activities, how much information about the borrower and the loan contained in the loan application meet the bank's standards set out in the document on the credit policy, as well as the standards of the banking supervisory authorities that control the quality of loans.
The stated criteria for assessing the creditworthiness of a bank client determine the content of the methods for assessing it. These methods include:
· assessment of business risk;
management assessment;
assessment of the financial stability of the client based on a system of financial ratios;
cash flow analysis;
collection of information about the client;
Observation of the work of the client by going to the place.
Despite the unity of the criteria and methods of assessment, there is specificity in the analysis of the creditworthiness of legal entities and individuals, large, medium and small customers. This specificity lies in the combination of the assessment methods used, as well as in their content.
The borrower's creditworthiness depends on many factors, each of which is not easy to assess and calculate. Most of the creditworthiness indicators analyzed in practice are based on data for the past period or at some reporting date, however, all of them are subject to the distorting effect of inflation. It is difficult to identify and quantify some factors, such as the moral character and reputation of the borrower. In addition, many methods and approaches are used to solve this problem, which do not exclude each other, but complement each other and make the assessment of the borrower's creditworthiness more relevant to reality.
This classification of approaches to assessing the creditworthiness of borrowers of commercial banks seems to be successful (Fig. 1.1).
Rice. 1.1. Classification of models for assessing the creditworthiness of borrowers
Classification models for analyzing the borrower's creditworthiness : Classification models make it possible to group borrowers: predictive models allow them to be differentiated depending on the probability of bankruptcy; rating - depending on their category, established with the help of a group of calculated financial ratios and significance levels assigned to them.
Rating score(total score) is calculated by multiplying the value of the indicator by its weight (significance factor) in the integral indicator. In world practice, when assessing creditworthiness on the basis of a system of financial ratios, the following five groups of ratios are mainly used: liquidity, turnover, financial leverage, profitability, and debt service.
A group of scientists (J. Shim, J. Siegel, B. Needles, G. Anderson, D. Caldwell) proposed using groups of indicators characterizing liquidity, profitability, long-term solvency and indicators based on market criteria. This approach makes it possible to predict long-term solvency, taking into account the degree of protection of creditors from non-payment of interest (interest coverage ratio). Ratios based on market criteria include share price-to-earnings ratio, dividends and market risk. With their help, the ratio of the current exchange rate of shares to income per share, the current profit of their owners, the volatility of the company's share price relative to the share prices of other companies are determined. However, the calculation of some coefficients is complicated and requires the use of special statistical methods. In practice, each commercial bank chooses certain coefficients for itself and resolves issues related to the methodology for calculating them. This approach makes it possible to characterize the borrower's financial condition on the basis of a synthesized rating indicator calculated in points assigned to each coefficient value. In accordance with the points, the class of the organization is determined: first-class, second-class, third-class or insolvent. The class of organization is taken into account by the bank when developing a scale of interest rates, determining lending conditions, establishing a lending regime (form of loan, size and type of credit line, etc.), assessing the quality of the loan portfolio, and analyzing the financial stability of the bank.
The modification of the rating score is credit scoring- a technique proposed in the early 40s of the XX century. American scientist D. Duran for the selection of borrowers for consumer loans. The difference between credit scoring lies in the fact that in the rating formula, instead of the value of the indicator, its private score is used. For each indicator, several intervals of values are determined, each interval is assigned a certain number of points or a class is determined. If the rating received by the borrower is lower than the value previously set by the bank employees, then such a borrower will be denied a loan, and if it complies with the standards, then the loan application will be granted. The advantages of the rating model are simplicity, the ability to calculate optimal values for particular indicators, the ability to rank organizations by results, and an integrated approach to assessing creditworthiness. However, there are a number of issues to be aware of when using this technique:
· the need for a careful selection of financial indicators (it is required to use indicators that describe different aspects of the borrower's work in order to more fully characterize his situation);
· the need to substantiate the significance coefficients for each group of indicators in accordance with the sector of activity of a particular borrower;
· Determining the magnitude of deviations in the border areas relating borrowers to different classes;
· the rating assessment takes into account the levels of indicators only relative to the optimal values corresponding to certain established standards, but does not take into account the degree of their implementation or non-fulfillment;
· financial ratios reflect the state of affairs in the past based on data on balances;
The calculated coefficients show only certain aspects of the activity;
· The system of calculated coefficients does not take into account many factors - the reputation of the borrower, the prospects and features of the market situation, the assessment of manufactured and sold products, investment prospects, etc.
Predictive Models, obtained using statistical methods, are used to assess the quality of potential borrowers. In multiple discriminant analysis (MDA), a discriminant function (Z) is used that takes into account some parameters (regression coefficients) and factors characterizing (the financial condition of the borrower (including financial ratios). Regression coefficients are calculated as a result of statistical processing of data on a sample of firms that either went bankrupt or survived for a certain amount of time.
The firm's Z-score is closer to the average bankrupt firm, and if its position continues to deteriorate, it will go bankrupt. If the managers of the firm and the bank make efforts to eliminate financial difficulties, then bankruptcy may not occur. Thus, the Z-score is a signal to prevent the bankruptcy of the firm. The application of this model requires a large, representative sample of firms across industries and scales of activity. The difficulty lies in the fact that it is not always possible to find a sufficient number of bankrupt firms within the industry to calculate the regression coefficient.
The most famous MDA models are the Altman and Chesser models, which include the following indicators: the ratio of own working capital to the amount of assets; the ratio of reinvested profits to the amount of assets; the ratio of the market value of shares to borrowed capital; the ratio of sales proceeds to the amount of assets; the ratio of earnings before interest and taxes to total assets.
An organization is assigned to a certain reliability class based on the Z-index values of the Altman model. Five-factor Altman model built on the basis of an analysis of the state of 66 firms and allows you to give a fairly accurate forecast of bankruptcy for two to three years in advance. Building such models in Russian conditions is quite difficult due to the lack of statistical data on the bankruptcy of organizations, the constant change in the regulatory framework in the field of bankruptcy and the recognition of the bankruptcy of an organization on the basis of data that cannot be accounted for.
Chesser model allows predicting non-fulfillment by the client of the terms of the loan agreement. Non-performance includes not only non-repayment of the loan, but also any other deviations that make the relationship between the lender and the borrower less favorable compared to the original conditions. The linear combination of independent variables used (Z) includes: the ratio of cash on hand and the value of marketable securities to the amount of assets; the ratio of net sales (excluding VAT) to the amount of cash on hand and the value of marketable securities; the ratio of earnings before interest and taxes to the amount of assets; the ratio of total debt to the amount of assets; the ratio of fixed capital to the value of net assets; the ratio of working capital to net sales. The resulting indicator can be considered as an assessment of the probability of non-fulfillment of the terms of the loan agreement. Chesser used data from a number of banks on 37 "satisfactory" and 37 "unsatisfactory" loans and used the balance sheet figures of borrowing firms for the year before receiving the loan. By substituting the model's calculated values into the formula for the probability of contract breach, Chesser correctly identified three out of every four cases studied.
When classifying loans, it is possible to use models CART( classification and regression trees), which translates as "classification and regression trees". This is a non-parametric model, the main advantages of which are the possibility of wide application, accessibility for understanding and ease of calculation, although complex statistical methods are used in the construction. In the "classification tree" borrowing firms are located on a certain "branch" depending on the values of the selected financial ratios; then there is a “branching” of each of them depending on the following coefficients. The accuracy of classification when using this model is about 90%. An example of a "classification tree" is shown in fig. 1.2, where Ki - financial coefficient; Рi - normative value of the indicator; B - alleged bankrupt; S - presumably steady state.
K1<= P1 К1 >P1
K2<= P2 К2 >P2 K3<= P3 К3 >P3
K4<= P4 К4 >P4
Rice. 1.2. "Classification tree" of the CART model
Creditworthiness assessment models based on complex analysis methods: In the case of using mathematical models, the influence of "qualitative" factors in the provision of loans by banks is not taken into account. These models only partially allow the bank's loan officers to draw a conclusion about the possibility of granting a loan. The disadvantages of classification models are their "closure" on quantitative factors, the arbitrariness of the choice of a system of quantitative indicators, high sensitivity to the unreliability of the initial data, cumbersomeness when using statistical intersectoral and sectoral data. Within the framework of complex analysis models, a combination of quantitative and qualitative characteristics of the borrower is possible. For example, in the practice of US banks, the six C rule, which is based on the use of six basic principles of lending, denoted by words starting with the English letter "C" (C): Character, Capacity, Cash, Collateral, Conditions, Control.
The nature of the borrower (Character); responsibility, reliability, honesty, decency and seriousness of the client's intentions.
Capacity: The loan officer must be sure that the client requesting the loan has the legal right to apply for the loan and sign the loan agreement, i.e. that the head or representative of the company (bank) applying for a loan has the appropriate authority granted to him by the founders or the board of directors to negotiate and sign a loan agreement on behalf of the company (bank).
Cash: An important aspect of any loan application is to determine the ability of the borrower to repay the loan with funds received from the sale or liquidation of assets, cash flow or borrowed resources.
Collateral: when evaluating collateral for a loan application, it is necessary to determine whether the borrower has sufficient capital or quality assets to provide the necessary collateral for the loan; unsecured loans are provided to first class borrowers with qualified management and excellent credit history.
Conditions: The loan officer needs to know how the borrower is doing, what the industry is doing, and how changing economic and other conditions in the country may affect the loan repayment process.
Control (Control) is reduced to finding out how changes in legislation, legal, economic and political environment can adversely affect the activities of the borrower and its creditworthiness.
Analysis of the client's creditworthiness in accordance with the basic principles of lending contained in methodology " CAMPARI", is to alternately highlight from the loan application and the attached financial documents the most significant factors that determine the client's activities, in their assessment and clarification after a personal meeting with the client. The name CAMPARI is formed from the initial letters of the following words: C (Character) - reputation, customer characteristic; A (Ability) - the ability to repay the loan; M(Margin) - margin, profitability; P (Purpose) - purpose of the loan; A (Amount) - loan amount; R (Repayment) - loan repayment terms; I (Insurance) - security, insurance of the risk of non-repayment of the loan.
In England, the banking services manual notes that the key word in which the requirements for issuing loans to borrowers are concentrated is "PARTS": P (Purpose) - purpose, purpose of obtaining a loan; A (Amount) - the amount, the amount of the loan; R (Repayment) - payment, return (of debt and interest); T (Term) - the term of the loan; S (Security) - ensuring the repayment of the loan.
In recent years, there has been some widespread methodology developed by specialists of the Association of Russian Banks (DRB) . According to this method, the assessment of the borrower's activity and the conditions of its lending involves an analysis of its creditworthiness in the following areas: "solidity" - the responsibility of management, the timeliness of settlements on previously received loans; "ability" - production and sale of products, maintaining its competitiveness; "yield" - the preference for investing in a given borrower; the “reality” of achieving project results; "reasonableness" of the requested loan amount; “returnability” due to the sale of the borrower's material values if his project is not fulfilled; "Security" of the loan with the legal rights of the borrower. It is recommended to evaluate the last four points based on the analysis of grouped balance sheet items in the following areas: profitability, liquidity, turnover of non-current and current assets, security. From each group, it is necessary to select one indicator that is most typical for the analyzed organization, and collect statistics on them. The disadvantages of the methodology are the impossibility of using it to assess creditworthiness for long-term lending and the fact that many risk factors are not taken into account, the effect of which may affect after a certain time.
In most cases, Russian banks in practice apply methods for assessing creditworthiness based on a set of financial ratios that characterize the financial condition of the borrower. The main problem in this case is the development of standard values for comparison, since there is a spread in values caused by the industry specifics of economic entities, and the acceptable standard levels of financial indicators given in the economic literature are calculated without taking this into account. Due to the lack of a unified regulatory framework in the sectoral context, an objective assessment of the financial condition of the borrower is impossible, since there are no comparative industry average, minimum acceptable and best indicators for this industry.
In modern conditions, commercial banks develop and use their own methods for assessing the creditworthiness of borrowers, taking into account the interests of the bank.
One of the most important elements of the methodology for analyzing the borrower's creditworthiness is its information base. The peculiarity of the formation and use of a database for analyzing creditworthiness is that without it it is impossible to realistically and effectively assess the degree of risk of future financial investments of credit resources in a particular business entity.
The information used in the analysis of creditworthiness should have the following main characteristics: completeness, reliability, availability and efficiency.
None of the sources of information is sufficient complete, since only on the basis of a comprehensive study and evaluation of data from different sources of information, an analyst can draw reasonable conclusions about the possibility of providing credit resources. Ignoring certain sources of information may affect the level of risk of lending in the direction of its increase. All sources of information must be available for the lender in the course of his analysis of the creditworthiness of the client, since on the basis of the financial statements provided by the borrower, constituent documents, audit information, business plans, the lender draws his conclusions and makes decisions. At the same time, the degree of trust between the borrower and the lender depends on how conscientiously the borrower treats the process of forming an information base.
Degree efficiency provision of financial statements, audit information, data from rating agencies and other sources depends on at what stage of the analysis of creditworthiness it is used. Degree relevance The regulatory and legislative framework in the field of credit relations largely affects various aspects affecting the rights and obligations of creditors and borrowers and determining the dynamics of the development of this process in modern market conditions.
In the course of the analysis, the information used by analysts should not be limited to purely accounting and reporting data, as this narrows the possibilities of creditworthiness analysis. Therefore, the information should include indicators characterizing:
¾ the state of the markets for resources used in the production of products (performance of work, provision of services);
¾ characteristics of the main competitors in the industry and the industry itself, in which the economic entity develops or intends to develop in the future;
¾ the state and prerequisites for the development of the political, economic and tax environment in the country as a whole and in the region;
¾ credit policy of the state for the near future, etc.
A variety of internal and external information is used to analyze creditworthiness.
To inside information can be attributed:
constituent documents;
· legal documents reflecting relationships with investors, depositors, suppliers, buyers, creditors, borrowers, etc.;
· Statistical reporting;
Acts of audits, audit and tax inspections;
· business plans and feasibility studies;
· primary documents reflecting the composition and valuation of fixed assets and current assets, business transactions, cash flow;
· design and estimate documentation;
Analytical accounting data;
data on the personnel of the organization's personnel;
accounting reports (including appendices and explanations).
External Information comes from sources outside the organization, such information includes:
· information from other credit institutions about an economic entity - a potential borrower;
information from credit bureaus;
· political information affecting economic spheres of activity;
· information on the state and prospects of development of various industries, interest rates on loans in credit institutions, prospects for changes in exchange rates;
· data on business entities directly related to the activity of a potential borrower (suppliers, buyers, investors, creditors) and influencing this activity;
information about the business reputation of the borrower, as well as new and personal qualities of the top management of the organization;
The assessment of the creditworthiness of large and medium-sized enterprises is based on the actual data of the balance sheet, income statement, loan application, information about the history of the client and his managers. The system of financial ratios, analysis of cash flow, business risk and management are used as methods for assessing creditworthiness.
Financial ratios for assessing creditworthiness
In world and Russian banking practice, various financial ratios are used to assess the borrower's creditworthiness. Their choice is determined by the characteristics of the bank's clientele, possible causes of financial difficulties, and the bank's credit policy. All coefficients used can be divided into five groups:
I - liquidity ratios:
II - coefficients of efficiency, or turnover;
III – financial leverage ratios;
IV - profitability ratios;
V - debt service ratios.
The creditworthiness indicators included in each of these groups may vary greatly. The following system can be cited as an example (Table 2.1).
Current liquidity ratio(Ktl) shows whether the borrower is able, in principle, to pay off his debt obligations.
Liquid assets are that part of current liabilities that relatively quickly turns into cash ready to pay off debt. Liquid assets in world banking practice include cash and receivables, in Russian - also a part of quickly sold reserves.
The purpose of the quick liquidity ratio is to predict the borrower's ability to quickly release funds in cash from its turnover to repay the bank's debt on time.
Table 2.1
Indicators | Regulatory levels* |
1. Liquidity ratios: |
|
current liquidity ratios | |
quick (operational) liquidity ratios |
|
2. Efficiency (turnover) ratios: |
|
inventory turnover |
|
receivables turnover |
|
turnover of fixed assets |
|
asset turnover |
|
3. Financial leverage ratio |
|
the ratio of all debt obligations (short-term and long-term) and assets |
|
the ratio of all debt obligations to equity | |
total debt to equity ratio | |
the ratio of all debt obligations and tangible share capital (share capital - intangible assets) |
|
ratio of long-term debt to fixed (main) assets | |
equity-to-assets ratio |
|
ratio of working capital to current assets |
|
4. Profit ratios: |
|
rate of return ratio |
|
profitability ratios |
|
earnings per share ratios |
|
5. Debt service ratios: |
|
interest coverage ratio | |
fixed payment coverage ratio |
|
Efficiency (turnover) ratios complement the first group of coefficients - liquidity indicators and allow you to make a more informed conclusion. For example, if liquidity ratios are growing due to an increase in accounts receivable and the cost of inventories while they are slowing down, the borrower's credit rating cannot be upgraded. The group of efficiency coefficients includes:
Inventory turnover:
a) =Accounts receivable turnover in days:
Turnover of fixed capital (fixed assets):
asset turnover:
Efficiency ratios are analyzed over time and compared with those of competing firms and with industry averages.
Financial leverage indicators characterize the degree of provision of the borrower with own capital.
As can be seen from Table. 2.1, the options for calculating the coefficients may be different, but their economic meaning is the same: to estimate the amount of equity capital and the degree of dependence of the client on the attracted resources. Unlike liquidity ratios, when calculating financial leverage ratios, all debt obligations of a bank client are taken into account, regardless of their maturity. The higher the share of borrowed funds (short-term and long-term) and the lower the share of equity, the lower the client's creditworthiness class. However, the final conclusion is made only taking into account the dynamics of profitability ratios.
profit ratios characterize the efficiency of the use of all capital, including its attracted part. The varieties of these coefficients are:
Rate of return ratios:
a)c) profitability ratios:
A comparison of three types of profitability ratios shows the degree of influence of interest and taxes on the profitability of the company.
The specific methodology for determining the numerator of these coefficients depends on whether interest or fixed payments are related to cost or paid from profit.
Debt service ratios show how much of the profit is used to repay interest or all fixed payments. These coefficients are of particular importance at high inflation rates, when the amount of interest paid may approach or even exceed the principal debt of the client. The greater part of the profit is directed to cover the interest paid and other fixed payments, the less it remains to pay off debt obligations and cover risks, i.e. the worse the client's creditworthiness.
The listed financial ratios can be calculated on the basis of actual reporting data. When the economy is stable or the client's position is relatively stable, the assessment of the borrower's creditworthiness in the future may be based on actual performance in past periods. In conditions of an unstable economy (for example, a decline in production), high inflation rates, actual indicators for past periods cannot be the only basis for assessing the ability of a client to repay its obligations, including bank loans, in the future. In this case, either forecast data should be used to calculate the named coefficients, or the considered method for assessing the creditworthiness of an enterprise (organization) will be supplemented by others. The latter include business risk analysis at the time of loan issuance and management evaluation.
When issuing loans for relatively long periods (a year or more), it is also necessary to receive from the client, in addition to a report for past periods, a forecast balance, a forecast of income, expenses and profits for the upcoming period corresponding to the period of the loan. The forecast is usually based on planning the rate of growth (decrease) in sales proceeds and is substantiated in detail by the client.
The financial credit ratios described are calculated based on average balance sheet balances at the reporting dates. Indicators for the 1st number do not always reflect the real state of affairs and are relatively easily distorted in reporting. The initial turnover indicator is the sales proceeds. By excluding individual elements from it (material and labor costs, interest, taxes, depreciation, etc.), intermediate indicators are obtained and, ultimately, net profit for the period is obtained.
Cash flow analysis as a way to evaluate
creditworthiness of the borrower
Cash flow analysis is a method for assessing the borrower's creditworthiness, which is based on the use of actual indicators characterizing the turnover of funds from the client in the reporting period. This method of cash flow analysis is fundamentally different from the method of assessing the creditworthiness of the client on the basis of a system of financial ratios, the calculation of which is based on balance reporting indicators.
Cash flow analysis consists in comparing the outflow and inflow of funds from the borrower for a period that usually corresponds to the term of the requested loan. When issuing a loan for a year, the analysis of cash flow is done on an annual basis, for a period of up to 90 days - on a quarterly basis, etc.
The difference between the inflow and outflow of funds determines the amount of total cash flow. As can be seen from the above list of elements of inflow and outflow of funds, changes in the size of inventories, receivables and payables, other assets and liabilities, fixed assets affect the total cash flow in different ways. To determine this effect, balances are compared for inventory items, debtors, creditors, etc. at the beginning and end of the period. An increase in the balance of inventories, debtors and other assets during the period means an outflow of funds and is shown in the calculation with a "-" sign, and a decrease is an inflow of funds and is recorded with a "+" sign. The growth of creditors and other liabilities is considered as an inflow of funds ("+"), the decrease - as an outflow ("-").
The cash flow analysis model is based on grouping the elements of inflow and outflow of funds by areas of enterprise management. These areas in the cash flow analysis model (CFA) can correspond to the following blocks:
Enterprise profit management;
Inventory and settlement management;
Management of financial liabilities;
Tax and investment management;
Management of the ratio of equity and loans.
For the analysis of cash flow, data are taken for at least three past years. If the client had a steady excess of inflow over outflow of funds, then this indicates its financial stability - creditworthiness. Fluctuations in the value of the total cash flow, as well as a short-term excess of the outflow over the inflow of funds, indicate a lower credit rating of the client. Finally, the systematic excess of the outflow over the inflow of funds characterizes the client as insolvent. The prevailing average positive value of the total cash flow (the excess of inflow over outflow of funds) can be used as a limit for issuing new loans. The specified excess shows in what amount the client can repay debt obligations for the period. Based on the ratio of the total cash flow and the amount of the client's debt obligations, its creditworthiness class is determined: standard levels of this ratio: I class - 0.75; II - 0.30; III - 0.25; IV - 0.2; V - 0.2; VI - 0.15.
Analysis of cash flow allows us to draw a conclusion about the weak points of enterprise management. For example, the outflow of funds may be associated with inventory management, settlements (debtors and creditors), financial payments (taxes, interest, dividends). Identification of weaknesses in management is used to develop lending conditions reflected in the loan agreement. For example, if the main factor in the outflow of funds is excessive diversion of funds into settlements, then a “positive” condition for lending to a client may be maintaining the turnover of receivables during the entire period of using the loan at a certain level. With such an outflow factor as an insufficient amount of equity capital, compliance with a certain standard level of the financial leverage ratio can be used as a credit condition.
To address the issue of the appropriateness and amount of a loan for a relatively long period, the cash flow analysis is done not only on the basis of actual data for past periods, but also on the basis of forecast data for the planned period. Actual data is used to evaluate forecast data. The forecast of the value of individual elements of the inflow and outflow of funds is based on their average value in previous periods and the planned growth rate of sales proceeds.
Business risk analysis as a way to assess
creditworthiness of the borrower
business risk is the risk associated with the fact that the circulation of the borrower's funds may not be completed on time and with the intended effect. Business risk factors are various reasons that lead to discontinuity or delay in the circulation of funds at certain stages. Business risk factors can be grouped according to the stages of the circuit.
I stage - creation of stocks:
Number of suppliers and their reliability;
Capacity and quality of storage facilities;
Compliance of the method of transportation with the nature of the cargo;
Availability of prices for raw materials and their transportation for the borrower;
The number of intermediaries between the buyer and the producer of raw materials and other material assets;
Remoteness of the supplier;
Economic forces;
Fashion for purchased raw materials and other values;
Currency risk factors;
The danger of introducing restrictions on the export and import of imported raw materials.
Stage II - production stage:
Availability and qualifications of the labor force;
Age and capacity of equipment;
Equipment load;
Condition of production facilities.
Stage III - sales stage:
The number of buyers and their solvency;
Diversification of debtors;
Degree of protection against non-payment of buyers;
The borrower's affiliation to the base industry by the nature of the finished product being financed;
The degree of competition in the industry;
Influence on the price of the credited finished product of public traditions and preferences, the political situation;
The presence of problems of overproduction in the market of these products;
demographic factors; » currency risk factors;
The possibility of introducing restrictions on the export from the country and the import into another country of products.
In addition, risk factors at the marketing stage can be combined from the factors of the first and second stage. Therefore, the business risk at the marketing stage is considered to be higher than at the stocking or production stage.
In conditions of economic instability, the analysis of business risk at the time of issuing a loan significantly complements the assessment of the client's creditworthiness based on financial ratios, which are calculated on the basis of average actual data of past reporting periods.
The listed business risk factors are necessarily taken into account when the bank develops standard forms of loan applications, feasibility studies of the possibility of issuing a loan.
The assessment of business risk by a commercial bank can be formalized and carried out according to a scoring system, when each business risk factor is evaluated in points (Table 2.2).
Table 2.2
Business risk criteria | |
I. Number of suppliers |
|
more than three | |
II. Supplier Reliability |
|
All suppliers have an excellent reputation | |
most of the suppliers are reliable as business partners | |
most suppliers are unreliable |
|
III. Cargo transportation |
|
within the city, there is an insurance policy, the type of transportation corresponds to the product | |
the supplier is distant from the buyer, there is an insurance policy, transportation corresponds to the goods | |
the supplier is distant from the buyer, transportation may lead to the loss of part of the goods and reduce its quality, have an insurance policy | |
supplier within the city, transportation does not match cargo, no insurance policy, etc. | |
IV. Warehousing of goods |
|
the borrower has its own storage facilities of satisfactory quality or storage facilities are not required | |
warehouse space for rent | |
storage space required but not available at the time of the business risk assessment |
|
A similar business risk assessment model is applied based on other criteria. Points are assigned for each criterion and summed up. The higher the score, the lower the risk and the greater the likelihood of completing the transaction with a predictable effect, which will allow the borrower to repay their debt obligations on time.
Determining the borrower's creditworthiness class
The client's creditworthiness class is determined on the basis of basic and additional indicators. The key indicators selected by the bank must be unchanged for a relatively long time. In the document on the credit policy of the bank or others, these indicators and their standard levels are recorded. The latter are focused on world standards, but are individual for a given bank and a given period.
The set of additional indicators may be revised depending on the current situation. They can be used as an assessment of business risk, management, the duration of the overdue debt to the bank, indicators calculated on the basis of the results account, the results of the analysis of the balance sheet, etc.
The client's creditworthiness class is determined on the basis of the main indicators and is adjusted taking into account additional ones.
Creditworthiness class according to the level of key indicators can be determined on a point scale. For example: I class - 100-150 points; II class - 151-250 points; III class - 251-300 points. To calculate the scores, the indicator class is used, which is determined by comparing the actual value with the standard, as well as the significance (rating) of the indicator.
The rating, or significance, of the indicator is determined individually for each group of borrowers, depending on the policy of a given commercial bank, the characteristics of the client, the liquidity of their balance sheet, and market position. For example, a high share of short-term resources, the presence of arrears on loans and non-payments to suppliers increase the role of the quick liquidity ratio, which assesses the ability of an enterprise to quickly release cash. The involvement of the bank's resources in lending to permanent reserves, the underestimation of the amount of equity raises the rating of the financial leverage indicator. Violation of the economic boundaries of the loan, "indebtedness" of customers put forward the level of the current liquidity ratio in the first place in assessing the creditworthiness.
The overall assessment of creditworthiness is given in points. The scores are the sum of the products of the rating of each indicator by the creditworthiness class. The 1st class is assigned with 100-150 points, the 2nd class - with 151-250 points and the 3rd class - with 251-300 points.
The same level of performance and rating in points can be achieved due to various factors, some of which are associated with positive processes, while others are associated with negative ones. Therefore, to determine the class, factor analysis of creditworthiness ratios, balance sheet analysis, and the study of the state of affairs in an industry or region are of great importance.
The creditworthiness of small enterprises can be assessed in the same way as the repayment capacity of large and medium-sized borrowers - based on financial credit ratios, cash flow analysis and business risk assessment.
However, the bank's use of financial ratios and the cash flow analysis method is difficult due to the state of accounting and reporting for these bank customers. Foreign and Russian small businesses, as a rule, do not have a licensed accountant. In addition, the audit costs for these bank customers are not available. Therefore, there is no audit confirmation of the borrower's report. For these reasons, the assessment of a client's creditworthiness is not based on his financial statements, but on the personal knowledge of the client's business by a bank employee. The latter involves constant contact with the client: a personal interview with the client, regular visits to his company.
In the course of a personal interview with the head of a small enterprise, the purpose of the loan, the source and the repayment period of the debt are clarified. The client must prove that the credited inventory will decrease by a certain date, and the credited costs will be written off to the cost of goods sold. For frequent visits to the enterprise, the bank lends only to nearby companies.
One more feature of small enterprises should be noted - their managers and employees are often members of the same family or relatives. Therefore, it is possible to mix the personal capital of the owner with the capital of the enterprise. From this follows the following feature in the organization of credit relations of the bank with small businesses abroad (USA): repayment of the loan is guaranteed by the owner, namely his property. But in this regard, when assessing the creditworthiness of a small client, the financial situation of the owner is taken into account. The latter is determined on the basis of a personal financial report.
the form of a personal financial report contains information about the assets and liabilities of an individual. In this case, pledged assets and secured liabilities are distinguished. Assets include cash, stocks and bonds, receivables from relatives, friends and others, real estate, life insurance buyout value, etc. Liabilities consist of debts to banks, relatives and others, bills and taxes owed, the value of mortgaged property , payments under contracts, loans used for insurance payments, etc. For a more detailed analysis, a breakdown of certain types of assets and liabilities of an individual is given.
Thus, the system for assessing the creditworthiness of small borrowers by a bank consists of the following elements:
1. Business risk assessment.
2. Observation of the work of the client.
3. Personal interviews of the banker with the owner of the enterprise.
4. Evaluation of the personal financial situation of the owner.
The assessment of the creditworthiness of an individual is based on the ratio of the requested loan and his personal income, the general assessment of the financial situation and property, family composition, personal characteristics, and the study of the client's credit history.
For example, in France, the creditworthiness of an individual is assessed using a scoring system. The program for determining the feasibility and conditions for issuing a consumer loan contains three sections: information on the loan and on the client, the financial situation of the client.
The first section contains information about the bank employee issuing the loan, the client's dossier number, the name of the agency, the type and amount of the loan, the frequency of its repayment, the interest rate without insurance payments, the date of the loan, the day of the month chosen by the client for repayment, the answer to the question on the need for insurance, the absolute amount of the monthly repayment of the loan with and without insurance payment, the total amount of interest and insurance payments to be paid to the bank. In the second section of the program, data are entered on the client's profession, his belonging to a certain social group, employer, net annual earnings, expenses for the year, work experience. The third section - the client's financial situation - contains information about the balances on current and savings accounts, the ratio of income and expenses. Based on the input of the listed information, the bank employee receives an opinion whether it is possible to issue a loan. If the answer is negative, the bank agency may refer the client to its directorate for additional consideration of the issue of the possibility of granting a loan.
In the United States, the basis for assessing the creditworthiness of an individual is the study of his credit history associated with the purchase of goods on credit in stores. The bank uses the information contained in the loan application: name, residential address and social security number. Based on these three parameters, you can collect information from banks, credit card companies, home owners about all cases of non-payment. The bank is interested in the number and size of non-payments that have taken place, the duration, and the method of repaying overdue debts. On this basis, a credit history is compiled.
In addition to credit history, the system for assessing the creditworthiness of an individual by American banks includes the following indicators: debt-to-income ratio, income stability and duration of work in one place, length of residence at one address, amount of capital.
Until recently, Russian banks, when assessing the creditworthiness of individuals, focused only on the financial aspect, in particular, the profitability of the borrower. Currently, for this purpose, the creditworthiness ratio is calculated as the ratio:CCRED = ≤ 0.3
To date, banks, in addition to this financial factor, take into account others: social, professional, property, special banking factor.
the age of the borrower;
· profession;
duration of work in one place;
The area of employment
availability of real estate;
availability of bank deposits;
credit history, etc.
In my term paper, I considered the most relevant topic at the present time, how to assess the creditworthiness of the borrower. For a bank that specializes in issuing loans, assessing the creditworthiness of potential borrowers is the main function. That is, the financial position of the bank will depend on the quality of the client's assessment. Risk reduction in lending transactions can be achieved on the basis of a comprehensive study of the creditworthiness of bank customers.
The analysis of creditworthiness begins with a review of the loan application and an interview with the borrower. This allows you to find out not only the important details of the loan transaction, but also to draw up a psychological portrait of the borrower, to assess the professional preparedness of the company's management, the realism of their assessments of the situation and prospects for the development of the enterprise.
Before making a decision on issuing a loan, the bank must give a description of the financial situation of the borrower. It is determined on the basis of data on the activities of the enterprise, including the amount of equity, data on profitability, the structure of current assets, their turnover, the composition and structure of sources of working capital, etc. At the same time, it is important that not only data on their turnover and the relationship of the turnover rate of various items of assets and liabilities.
Modern banking practice uses many ways to assess the financial position of the borrower. Among them, the most recognized assessment was based on the analysis of financial ratios, combined into four main groups: indicators of liquidity, financial stability, business activity and performance efficiency.
But when using these coefficients, it is impossible to rely only on any one of these coefficients. All information received by the bank must be analyzed in essence, and the main result, the decision to issue or refuse to issue a loan, the bank must take on the basis of all data.
Each bank dealing with loans has its own credit rating system. In some way, they all rely on certain methods, but each bank has its own priorities for lending to a particular area of activity, therefore, as many banks exist, there are as many methods for assessing the borrower's creditworthiness.
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Banking / ed. O.I. Lavrushin; 3rd ed., revised. and additional – M.: KNORUS, 2005.
Sevruk V.T. Analysis of the creditworthiness of the joint venture // Money and Credit, 1999, No. 3. - p. 43
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Endovitsky D.A. Analysis and assessment of creditworthiness: the borrower: educational and practical manual / D.A. Endovitsky, I.V. Bocharov. – M.: Knorus, 2005. – p. 36-38
- Assessment Methods and Methods for Calculating Client's Creditworthiness Indicators
- The concept of customer creditworthiness
- the required amount;
- level of personal income;
- analysis of the general financial condition;
- the value of the client's property;
- composition of his family;
- characteristics of the borrower's personality;
- study of credit history.
- scoring scores;
- study of credit history;
- solvency assessments.
- the type, term and amount of the loan;
- marital status and number of dependents of the client;
- date, place of birth and nationality of the borrower;
- nature and place of residence (with relatives, rented housing, municipal apartment);
- positions and professions;
- postal address of the employer;
- client's annual income;
- his current payments (example - rent, repayment of loans);
- having savings in the bank
- The bank can evaluate the client both listed and in other ways (for example, call home or work, request information from the tax office).
- As a rule, the results of the assessment (as well as the rationale for the decision) are not disclosed by the bank.
- The assessment of a borrower-legal entity is carried out by methods different from the analysis of the creditworthiness of private clients.
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Introduction. 2
CHAPTER 1. THEORETICAL ASPECTS OF ASSESSING THE BORROWER'S CREDIT POSSIBILITY.. 6
1.1. Credit policy as the main tool for achieving the strategic goals of a commercial bank. 6
1.2. Organization of the credit risk management process in a commercial bank 15
1.3. Creditworthiness of the borrower and methods of its assessment. 26
CHAPTER 2. ANALYSIS OF CREDIT POSITION OF THE BANK CLIENT.. 42
2.1. Comparative analysis of the credit policy of ZAO CB Pyatigorsk and OAO Stavropolpromstroybank. 42
2.2. Assessment of the creditworthiness of the borrower. 56
2.3. The effectiveness of the methodology for assessing the creditworthiness of the borrower and its improvement. 72
Conclusion. 90
LIST OF SOURCES USED.. 93
The credit and financial system is one of the most important and integral structures of a market economy. The development of the banking system and commodity production historically proceeded in parallel and were closely intertwined. Being at the center of economic life, banks mediate ties between depositors and producers, redistribute capital, and increase the overall efficiency of production.
Credits play a special role, turning, in essence, into the main source of financing the national economy with additional monetary resources. With the transition from a command-and-control to a market economy, the monopolized, state-owned banking structure becomes more dynamic and flexible. The banking system is based on private and collective ownership and is focused on overcoming competition and making a profit.
In the process of conducting active credit operations in order to make a profit, banks are faced with credit risk, that is, the risk of non-payment by the borrower of the amount of principal and interest due to the lender. Each type of credit transaction has its own reasons and factors that determine the degree of credit risk.
In particular, it may arise when the borrower's financial situation worsens, unforeseen complications occur in his plans, collateral is not insured, the manager lacks the necessary organizational skills or experience, etc. These and many other factors are taken into account by bank employees when assessing the creditworthiness of an enterprise and the security offered as collateral.
The tasks of improving the functioning of the credit mechanism put forward the need to use economic methods of credit management, focused on observing the economic boundaries of the credit. This will prevent unjustified loan investments, ensure timely and full repayment of loans, and reduce the risk of non-payment.
When analyzing creditworthiness, banks must decide the following questions: is the borrower able to fulfill his obligations on time, is he ready to fulfill them? The first question is answered by an analysis of the financial and economic aspects of the activities of enterprises. The second question is of a legal nature, and is also related to the personal qualities of the leaders of the enterprise. The composition and content of the indicators follow from the very concept of creditworthiness. They should reflect the financial and economic condition of enterprises in terms of the efficiency of placement and use of borrowed funds and all funds in general, assess the ability and willingness of the borrower to make payments and repay loans within a predetermined period.
The topic of this thesis: “The effectiveness of the methodology for assessing the creditworthiness of a client” is extremely relevant. Any activity, whatever it may be, contains a certain amount of risk and chance of the most varied nature. Any economic activity is subject to uncertainty associated with changes in market conditions, i.e. to a large extent with the behavior of other economic entities, their expectations and their decisions. Therefore, interest in this topic will never decrease, and the methods will be expanded and supplemented. Most of all, banks need information about the creditworthiness of enterprises and organizations: their profitability and liquidity largely depend on the financial condition of customers. Risk reduction in lending transactions can be achieved on the basis of a comprehensive study of the creditworthiness of bank customers, which at the same time will allow organizing lending, taking into account the boundaries of the use of the loan. Based on the studied material, this topic is quite widely disclosed and is of great interest for a deeper study, especially in terms of the effectiveness of methods for assessing the creditworthiness of enterprises.
This topic is of great interest for the study of not only Russian but also foreign economists. In the scientific literature, attention is paid in great detail to all aspects of this problem, in particular, to the financial analysis of both enterprises and credit institutions. But there is not enough information on evaluating the effectiveness of the methods used by banks to assess the creditworthiness of customers.
The purpose of this thesis is to study approaches to the analysis of the creditworthiness of customers, including the example of the activities of the commercial bank Pyatigorsk, and on this basis, to develop recommendations for improving this process. To achieve the goals set, it is necessary to solve the following tasks:
Define the bank's credit policy
Define creditworthiness and credit risk,
Determine the information base of the analysis,
Analyze and compare the credit policy of ZAO CB Pyatigorsk with the credit policy of OAO Stavropolpromstroybank,
Analyze the methodology for assessing the creditworthiness of a client using the example of Stroytekhtsentr LLC,
Consider the trend in the financial condition of the bank,
Determine the effectiveness of the methodology for assessing the creditworthiness of a bank client.
When writing the work, the economic literature of domestic and foreign authors was used, revealing the principles and methods for studying the creditworthiness of borrowers of credit institutions in the USA, France and Russia, the financial statements of Stroytekhtsentr LLC, which operates in accordance with the charter and other constituent documents, the financial statements of CJSC CB Pyatigorsk ". A lot of information on this topic is presented in periodicals such as Banking, Money and Credit, Audit and Financial Analysis, Banking Journal, Kommersant, Economics and Life. In addition, the thesis was based on laws, instructions and other legal acts, as well as internal regulations and instructions of a commercial bank.
For clarity, the thesis reflects diagrams, graphs and tables.
The practical significance of the thesis lies in the conclusions that will help commercial banks improve their methodology for determining the creditworthiness of a client, and, consequently, improve their financial performance.
The credit policy of a commercial bank is a system of monetary measures carried out by the bank to achieve certain financial results, and is one of the elements of banking policy.
At the first stage of the implementation of the credit policy, the assessment of the macroeconomic situation in the country as a whole, the region of work of potential borrowers in particular, the analysis of the sectoral dynamics of the selected areas of lending, the verification of the readiness of the bank's staff to work with various categories of borrowers, the adoption of a number of intrabank regulatory documents. The work carried out takes place outside the field of activity of the direct credit unit and relates more to the work of the analytical and marketing services of the bank, but the presence of these necessary elements of analysis makes the lending process meaningful and prepared.
Based on the studies carried out, the bank's management adopts a credit policy memorandum for a specific period (usually 1 year). This document sets out:
1. The main directions of the bank's credit work for the coming period, specific indicators of credit activity (norms and limits) that provide the necessary level of profitability and protection from credit risks, for example:
– the ratio of loans and deposits;
- the ratio of equity and assets;
– limits for segments of the bank's asset portfolio as a whole;
– limits for segments of the loan portfolio (limits for lending to enterprises of one industry, one form of ownership, one type of lending, etc.). Typically, the limit includes no more than 25% of the total loan portfolio. An increase in a certain segment beyond the limit is possible if there are ways to protect against this increased credit risk;
– client limits:
a) for shareholders (shareholders);
b) for old, with a certain history of relationships, clients;
c) for new clients;
d) for non-customers of the bank;
– geographic lending limits (required for banks with out-of-town branches with different levels of staff preparedness for high-quality lending work, as well as for monobanks, but wishing to conduct active operations in certain regions);
– requirements for working with collateral (types of collateral, formalization standards, margin in valuation, etc.);
– requirements for documentary execution and support of loans;
– the planned level of credit margin and mechanisms for making a decision to change it.
2. The Regulations on the procedure for issuing loans are approved, which reflects:
– organization of the credit process;
- a list of required documents from the borrower and standards for the preparation of draft loan agreements;
Assessment of the creditworthiness of bank customers. The concept of client's creditworthiness Methods for assessing and calculating the client's creditworthiness indicators The concept of client's creditworthiness Credit operations of the bank are accompanied by numerous and varied risk factors that can lead to non-repayment of the loan, the loss of both borrowed and own funds of the bank. To prevent such situations, the bank must be convinced of the creditworthiness of the potential borrower. The task of assessing the creditworthiness of the client ...
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Topic 10 . Assessment of the creditworthiness of bank customers.
Credit operations of the bank are accompanied by numerous and varied risk factors that can lead to non-repayment of the loan, the loss of both borrowed and own funds of the bank. To prevent such situations, the bank must be convinced of the creditworthiness of the potential borrower.
The creditworthiness of the debtor is understood as his ability to fully and on time to fulfill obligations under the loan agreement.
The task of assessing the creditworthiness of the client is to determine the degree of risk that the bank is willing to take on when issuing a loan.
The purpose of potential risk assessment is to make a decision on issuing a loan to a given client. The conditions under which a loan can be granted are also determined by an analysis of the borrower's creditworthiness, an assessment of his financial situation, both now and taking into account the trend for the future.
At the initial stage of the organization of the credit process, the bank examines the documents submitted by the borrower for obtaining a loan, in terms of its legal capacity.
Creditworthiness assessment occurs not only at the stage of issuing a loan. It accompanies the entire credit process and is an obligatory element of credit monitoring.
Creditworthiness analysis involves the study of economic indicators, as well as other information reflecting the market position of the borrower, the competitiveness of its products and prospects.
To assess the creditworthiness, the credit history of the client is important, for the study of which banks use information received from the Credit Bureau. "Credit Bureau" is an automated information system for receiving, generating, processing, storing and providing by the National Bank information on the execution of loan agreements. In order to accumulate information about their clients, all banks are required to provide the Credit Bureau with information on the execution of all loan agreements, regardless of the loan amount.
The assessment of creditworthiness and a positive opinion on the loan application of the borrower are the basis for making a decision on issuing a loan.
2. Methods of assessment and methodology for calculating the indicators of the creditworthiness of the client
Each bank determines the methodology for calculating creditworthiness independently. Banks are required to form their own system for assessing the financial condition of the debtor using the approaches used in domestic and international banking practice. The applied methods and approaches for assessing creditworthiness and solvency are reflected in the local regulatory legal acts of the bank. The most convenient option for a bank is when it has various methods for assessing creditworthiness for the main groups of borrowers, including individuals applying for a consumer loan.
Credit scoring can be performed using the results of credit scoring, which is understood as a mathematical or statistical scoring model, which is usually used when considering the creditworthiness of individuals.
Sources of information for the analysis of creditworthiness are financial reporting forms, decoding of individual balance sheet items and documents confirming the fulfillment of conditions for previously received loans. The Bank is entitled to use other available sources of information about the borrower, including those received from third parties.
Traditionally, the creditworthiness calculation scheme includes two stages:
1st stage - assessment of the economic situation of the enterprise on the basis of financial indicators adopted by the bank, which have a regulatory value;
Stage 2 - additional assessment of creditworthiness based on qualitative indicators of financial statements and other information. An analysis of the enterprise's activities by qualitative parameters allows us to calculate the final class of its creditworthiness.
The basis for determining the creditworthiness of the borrower at both stages is the analysis of its financial and economic condition according to external financial statements for at least a year. The structure of such an analysis is usually made up of five main blocks:
composition and structure of the balance sheet;
financial stability of the enterprise;
liquidity of its assets and solvency;
business activity;
profitability.
In banking practice, the following methods are usually used to study the financial condition of a client based on its balance sheet: analysis of absolute indicators, vertical and horizontal analysis, calculation of relative indicators or ratios. The latter method is the most common; on its basis, banks carry out rating assessments of creditworthiness.
Below is a list of the main relative indicators that are used by many banks to analyze the financial and economic condition of borrowers.
The coefficient of security with own working capital - is calculated as the ratio of the company's own working capital to the total value of current assets, i.e. the total of section III of the balance sheet liability and line 640 “Reserves for future expenses” minus the total of section I of the balance sheet asset refers to the total of section II of the balance sheet asset. It characterizes the presence of the enterprise's own working capital and is the main criterion for determining the insolvency of the enterprise. The standard value varies depending on the industry and is at least 0.1.
Current liquidity ratio (coverage) - is calculated as the ratio of current assets to short-term liabilities, i.e. the ratio of the total of section II of the balance sheet asset to the total of section V of the balance sheet liability minus line 640 “Reserves for future expenses”. The ratio shows the sufficiency of working capital, which can be used to pay off short-term liabilities of the enterprise. Traditionally, the minimum allowable value is not less than 1, otherwise the borrower is assessed as insolvent. The optimal value is 1.7. Regulatory significance has branch features.
Absolute (fast) liquidity ratio - is calculated as the ratio of the most liquid assets to short-term liabilities, i.e. the amount of cash (line 260 of the balance sheet) and short-term financial investments (from line 270 of the balance sheet) to the total of Section V of the balance sheet liability: minus line 640 “Reserves for future expenses”. The value must be at least 0.2, a lower indicator indicates a decrease in the solvency of the enterprise.
The coefficient of autonomy (financial independence) is calculated as the ratio of equity to the value of the company's property or to the balance sheet, i.e. the sum of the total of section III of the liability of the balance sheet and line 640 “Reserves for future expenses” to the total of the balance sheet currency. The minimum value is kept at the level of 0.5, its excess is a sign of the growth of the financial independence of the enterprise, the expansion of the ability to attract funds from outside.
Financial stability ratio - is calculated as the ratio of permanent capital to the value of the company's property, i.е. the amounts of sections III and IV of liabilities and line 640 “Reserves for future expenses” to the total of the balance sheet currency. The minimum value corresponds to 0.5. This indicator allows you to assess the stability of the resource base of the enterprise.
The ratio of securing financial liabilities with assets (attracting) characterizes the ability of an enterprise to fulfill its financial obligations, is defined as the ratio of all long-term and short-term liabilities to the total value of property, i.e. the sums of the results of IV and V sections of the balance sheet liability, minus line 640 “Reserves for future expenses” to the sum of the total of the balance sheet currency. The standard value for the indicator is below 0.85.
The ratio of borrowed and own funds of the enterprise (financial leverage) is the ratio of the sum of the results of IV and V sections of the balance sheet liability minus line 640 “Reserves for future expenses” to the sum of the total of section III of the liability of the balance sheet and line 640 “Reserves for future expenses”. The value within the normal range is less than 0.7. Its excess indicates a high dependence of the enterprise on external sources, which means a loss of financial stability.
The coefficient of maneuverability is defined as the ratio of own working capital to the total value of the company's own capital. A value in the range of 0.2-0.5 is considered normal. The closer the value of the indicator to the upper limit, the more opportunities the company has for financial maneuvering.
In addition to the above ratios, indicators of turnover of working capital, credited assets, receivables and payables, goods shipped, as well as other indicators at the discretion of the bank, are important for assessing creditworthiness.
Creditworthiness assessment based on qualitative analysis is both a continuation and a necessary component of the quantitative analysis of the company's financial statements. Includes an analysis of the possibility and conditions of repayment of the loan, ways to ensure the return of the loan and other areas.
An assessment of the applicant's creditworthiness according to the methodology adopted by the bank may be accompanied by a rating of borrowers, which allows standardizing approaches to clients in assessing credit risk when concluding a loan agreement and structuring its conditions, in the process of credit monitoring.
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Creditworthiness of the borrower
The creditworthiness of the borrower of the bank is his ability to fully and on time pay off the loan taken (return interest and the amount of the principal debt).
The concept of "creditworthiness of the client" is different from the term "solvency". The creditworthiness does not take into account past delays in payments, but gives a forecast of debt repayment in the near future. The degree of insolvency is one of the criteria that affects the assessment of the creditworthiness of a bank borrower.
The assessment of the client's creditworthiness is based on:
A comprehensive methodology for assessing a client's creditworthiness consists of:
Borrower assessment by scoring method
The scoring method is a developed system of criteria in which a certain score is assigned to each indicator. The number of points scored by the client shows the ability to return the amount taken from the bank and the interest accrued on it. The data for scoring is contained in the client's application form. The bank analyzes information about:
The most commonly used model is based on the maximum and minimum values of the indicator (for example, the creditworthiness of a borrower is assessed in Sberbank).
If the accumulated scoring score is below the acceptable minimum, then the decision to approve the loan can be made individually. Exceeding the lower score limit is the basis (but not the only one) for resolving the issue of issuing a loan in favor of the borrower.
The scoring is considered as preliminary. It is added by a more detailed analysis of the financial situation of the borrower and the collection of additional information.
Analysis of the client's credit history
Each bank can work with one or several Credit Bureaus at the same time. Receiving from the BCI information about the payment discipline of the client, credit organizations make a decision to issue or refuse a loan.
Each bank independently determines the admissibility of the presence of delays in the credit history of the client. If one bank can turn a blind eye to delays in payments, then even short-term delays are unacceptable for another.
Assessment of the client's solvency
These methods for assessing the borrower's creditworthiness are often supplemented by an analysis of financial indicators of solvency.
When issuing a loan, many banks calculate the client's solvency as an average monthly income over the past six months. Information is taken from a salary certificate in the form of a bank or 2NDFL. The client's income, reduced by mandatory payments, is adjusted by an indicator that depends on the size of the client's income (this coefficient is from 0.3 to 0.6). The higher the income, the higher the adjustment factor.
Solvency is proportional to the term of the loan:
Solvency for the period =(average monthly income - mandatory payments) * adjustment factor * loan term
From this ratio, the maximum possible loan amount that can be issued to a client at a given level of income is determined. The amount of the loan and the amount of accrued interest on it cannot go beyond the solvency of the client.
An example of assessing the borrower's creditworthiness
The scoring of the client takes place automatically (except for the situation when clarification of information is required to make a decision). After entering the application into the bank software, the decision will be made by the system within 1-10 minutes.
In the process of considering the application, an automatic request is made to the BCI and the solvency of the client is analyzed. Based on the results of a comprehensive assessment of the borrower's creditworthiness, a decision is made on the submitted application.
Assessment of the client's creditworthiness. Important to remember:
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