SUMMER INTERNSHIP PROJECT REPORT

SYMBIOSIS SCHOOL OF BANKING MANAGEMENTConstituent of symbiosis International University

Accredited by NAAC with ‘A’ Grade

Established under Section 3 of the UGC Act, 1956, vide notification No: F.9.12/2001-U-3of the Government of India.

INTERNAL CREDIT RATING FOR LOANS BY INDIAN BANK

Internship Report submitted to SIU in partial completion of the requirement of

MBA Banking Management at Symbiosis School of Banking Management

Pune-412115.

Puneet Shekhar Nayak Mr. Shridhar Potdar Mr. Sudhir Alladwar

PRN: 07 PROJECT MENTOR (SSBM) PROJECT MENTOR AT THE BANK

APRIL 16, 2013 TO JUNE 8, 2013

ACKNOWLEDGEMENT-

I express my sincerest gratitude and thanks to Mr. Sudhir Alladwar (ABM, Indian Bank, Kirkee Branch,

Pune) for giving his kind support in completing my 8 week internship.

Under his guidance I was able to get insights into retail banking and got to learn that what is banking

from other side of table.

I would also like to thank the overwhelming support of all the employees of the branch who gave me an

opportunity to learn and gain knowledge about the various aspects of the industry.

I would like to thanks Mr. Shridhar Potdar (Faculty-Symbiosis School of Banking Management) for his

constant support and valuable suggestions without which this project would not been successfully

completed.

2

Student profile-

Name – Puneet Shekhar Nayak

Educational qualification-

Sr.No

.

Degree School/ College

1 10th R.P.M.Academy

2 12th Ann Mary School

3 Graduation (B.B.A) Institute of Management studies, Dehradun

4 M.B.A Symbiosis school of Banking Management

Work experience- NIL

Internship – Indian Bank (Kirkee Branch, Pune)

Area of Internship- Retail and SME lending

3

TABLE OF CONTENT

ACKNOWLEDGEMENT- 2

STUDENT PROFILE- 3

EXECUTIVE SUMMARY- 7

BANKING SECTOR IN INDIA 8

INTRODUCTION 10

BUSINESS OF INDIAN BANK 12RETAIL AND AGRICULTURE- 12COMMERCIAL BANKING- 12CORPORATE BANKING- 12SME BANKING- 13STRATEGIES ADOPTED BY INDIAN BANK 13PRODUCTS AND SERVICES OF INDIAN BANK 14LOAN PRODUCT/SERVICE 14DEPOSIT PRODUCTS 18

INTRODUCTION- INTERNAL CREDIT RATING 20

FUNCTION OF CREDIT RATING- 21ADVANTAGE OF INTERNAL CREDIT RATING 21

EXPECTATIONS OF BANK RISK RATING SYSTEM 22

CORPORATE GOVERNANCE AND OVERSIGHT- 22

METHODOLOGY USED BY BANKS FOR INTERNAL RATING 23

RISK RATING (INDIAN BANK) 24

SCOPE OF INTERNAL RATING- 25

OBLIGOR RATING- 25FACILITY RATING- 25

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RATING GRADES/ STRUCTURE- 25

WHY BANKS DO THEIR OWN INTERNAL RATING? 27

DEVELOPMENT IN BANKS RISK RATING METHOD- 27

CREDIT SCORING- 29

INTRODUCTION 29HOW SCORING IS DONE- 30

SME RATING MODEL- 33

RISK ASSESSMENT MODEL- RAM 33FEATURES- 33

RATING CRITERIA: 34

FINANCIAL CONDITION 34MANAGEMENT AND OWNERSHIP STRUCTURE 34QUALITATIVE FACTORS: 34OTHERS: 34FACILITY 35COLLATERAL 35

SAMPLE OF RAM RATING- 36

RESEARCH METHODOLOGY 37

PROBLEM STATEMENT- 37OBJECTIVE OF STUDY- 37RESEARCH TYPE 37COVERAGE- 37DATA COLLECTION- 38SECONDARY DATA- 38LIMITATION OF STUDY- 38EXPECTED CONTRIBUTION OF STUDY- 38

BIBLIOGRAPHY 39

5

INTRODUCTION

6

Executive summary-

Following the crises and deep transformations which marked the world economy after the

World War II, Basel Committee developed a Basel Agreement, published in 1988 and revised in

2004.

The major objectives of the revised agreement, called Basel II Agreement, are the same –

promotion of bank system security and soundness and increase of competitive equality of banks

This project report is focused on credit rating for SME loans and Retail loan (education

loan). This project report gives insight into the internal credit rating procedure followed by

Indian Bank to rate its retail as well as SME customers. Indian Bank follows a strict procedure to

scrutinize the details of customers before issuing loans and advances. This strict procedure has

helped bank to reduce to number of loan defaults (NPA).

7

BANKING SECTOR IN INDIA

Banking System in India

Reserve bank of India (Controlling Authority)

Banks

Commercial Regional Rural Land Development Co-operative

Banks Banks Banks Banks

Public Sector Banks Private Sector Banks

SBI Groups Nationalized Banks Indian Banks Foreign Banks

8

BANK PROFILE- INDIAN BANK

9

Introduction

- Founded- March, 5,1907

- Commenced Operation- August, 15, 1907

- Nationalized- July,19, 1969

- State owned financial service company

- Headquarter- Chennai, India

- First international branch- Colombo 1932

Branches-

In India- 2089

International-

o Singapore-1

o Sri-Lanka- 3

Financials -

- Total business (as on 31/3/2012)- Rs.2,11,988 crores

- Operating Profit (as on 31/03/2012) Rs.3,463.17 crores

- Net Profit (as on 31/03/2012) Rs. 1746.97 crores

History

Indian Bank (IB) is one of the oldest banks in India and its Headquarters in Chennai, The

Bank was founded by Annamalai and Ramaswami Chettiar on 15th August 1907 as part of

the Swadeshi movement. Seek to provide a comprehensive range of financial products and

services to all our customers under one roof.

10

11

2007-

08

2008-09 2009-10 2010-11 2011-12

Number of offices 1577 1680 1792 1899 1993

Number of

employees

20548 19993 19641 19311 18782

Business per

employee

48.80 61.70 76.10 93.00 111.40

Profit per employee .49 .62 .79 .89 .93

Capital and

reserves& surplus

51605 71359 82721 95211 108014

Deposits 610459 725818 882277 1058042 1208038

Investments 219151 228006 282638 347838 379760

Advances 398387 513965 621461 752499 903236

CRAR 12.475 13.98 12.71 13.56 13.47

BUSINESS OF INDIAN BANK

Business of Indian Bank is divided in four main areas:

i) Retail, and Agriculture

ii) Corporate

iii) Commercial financial services

iv) SMEs.

Retail and Agriculture-

Retail banking business provides financial products and services to retail

customers. It includes housing, retail trade, and other personal loans and deposit services.

It also includes distribution of products such as global debit and credit cards, third party

products such as mutual fund products, life and nonlife insurance policies, as well as

mediclaim policies.

Bank focus on addressing the needs of agricultural customers and offer

specialized products and services that cater to the agricultural and rural sectors. It

includes direct financing to farmers for production and investment, as well as indirect

financing for credit to suppliers of agricultural inputs and infrastructure development. Set

up of rural Internet Kiosk Centers in 12 locations to facilitate banking information in

rural areas.

Commercial Banking-

Indian Bank also deals in commercial banking products and services to corporate and

commercial customers (mid-sized and small businesses) and government entities. Loan

products include term loans for the construction of assets as well as short-term loans,

cash credit, and other working capital financing and bill discounting. Bank also deals in

letters of credit and guarantees.

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Corporate banking-

Corporate banking products are intended to facilitate the establishment, expansion

and modernization of businesses, including the acquisition of fixed assets, plant and

machinery and meeting working capital needs. Bank provides flexible security

requirements to such borrowers to help make credit more accessible to them.

SME Banking-

The fourth business segment is for SMEs through which bank provide financial

services to medium enterprises and SSIs. Products for this sector are intended towards

establishing, expanding and modernizing of business entity, including acquisition of fixed

assets, plant and machinery and meeting working capital needs.

STRATEGIES ADOPTED BY INDIAN BANK

1- Continue to develop technological capabilities

2- Maintain and enhance franchise in agriculture and SME sector

3- Enhance retail banking business and focus on small business

4- Build and expand rural area business

5- Strengthen and expand corporate and commercial products and services

6- Maintain high asset quality through comprehensive risk management

7- Leveraging on strong brand equity and expansive branch network

8- Attract and retain skills and experienced professionals

9- Cost control

10- Strategic alliance

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PRODUCTS AND SERVICES OF INDIAN BANK

Loan Product/Service

1- Retail

Sr. Variety of loans Brief description

1 Housing loan Long term loans to customers to finance the purchase,

construction, repair and renovation of homes and the

purchase of home sites.

2 Education loan Provide financial assistance for studies both in India and

abroad on reasonable terms to needy and meritorious

3 Vehicle loan Finance the purchase of both two wheelers and four

wheelers, including second-hand vehicles.

4 Consumer durables Loan for purchase of consumer durables and white goods,

such as TVs, air-conditioners.

5 Personal loan Loans designed particularly for the salaried classes

6 Professional loan Loans to qualified professionals, such as chartered

accountants, architects.

These loans can be used for business purposes, including the

purchase of necessary tools and equipment, the purchase of

vehicles, the upgrading of existing equipment etc.

7 Mortgage and

improvement

Financing against immovable property. This loan is available

in the form of a term loan or a secured overdraft with the

option of fixed or floating rates.

8 Loan to educational

Institutes

Loan to schools and other reputed educational institutions to

construct or upgrade buildings.

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2- Corporate Loans

Sr. Variety of Loans Brief Introduction

1 Term loan Finance the creation and improvement of assets,

including project finance.

Secured by the project assets and personal property

financed, and by other assets of the borrower

2 Cash credit / other working

capital facilities

Revolving credit facilities secured by working capital

assets, such as inventory and receivables.

overdrafts, working

Demand loans, working capital loans and bill

discounting facilities to our corporate and commercial

borrowers.

3 Letter of Credit Generally provided as part of a package of working

capital financing products or term loans.

This facility is often partially or fully secured by assets,

including cash deposits, documents of title to goods,

stocks and receivables.

4 Bank gurrantee Issue guarantees on behalf of customers to guarantee

their payment and performance obligations.

Secured by account indemnities, a counter guarantee or a

fixed or floating charge on the assets of the borrower,

including cash deposits.

5 Loan against shares/ securities It involve issue of loans to corporate houses for purchase

of shares or securities.

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Sr. Variety of loan Brief introduction

1 Kisan Credit Card (KCC) Short term production credit to farmers under the Kisan

Credit Card scheme in the form of cash credit for

providing hassle-free credit to agriculturists.

2 Sugar premium loan To enhance the flow of credit to registered cane

growers to meet their investment credit requirements

related to farm activities.

Farmers who have been supplying their

cane to reputed sugar mills for the prior three years are

eligible.

4 Agriculture produce marketing loan To provide finance against pledge of Warehouse

receipts, cold storage receipts etc.

To avoid distress in sale of agricultural and enable them

to get a remunerative price.

5 Joint Liability group (JLG) To augment flow of credit to tenant farmers cultivating

land either as oral lessees or share croppers an small

farmers who do not have proper title of their land

holding through formation and financing of JLGs.

6 Loan for purchase of pre-used tractors

for agriculture

To meet out of the needs of farmers who cannot afford

to buy a new tractor.

Farmer having minimum of 4acres of irrigated land or

8acres of dry land are eligible for this loan.

1- Agricultural and priority sector loan-

2- Small and Medium Sized Enterprises (SME) Loans-

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Sr. Variety of loans Brief introduction

1 My own Shop Loan for customers wishing to purchase commercial

space and new or second

hand shops necessary for running their business

2 IB Aayushmaan Loan loans for the construction, renovation or upgrade of

gyms or fitness center and the purchase of fitness

equipment

3 IB Shanti Niketan loans for the extension or renovation of hostels for

working women, men or students.

4 Annapoorna and Aroghya Loan loans for the establishment, expansion or

renovation of small to mid-size hotels, restaurants,

bakeries and other service oriented enterprises.

5 IB BPO finance for customers wishing to establish, renovate or

upgrade BPO centres

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Deposit products

Sr. Variety of deposit products

1 Savings account

2 Current account

3 Fixed deposits

4 Recurring deposit

5 Facility deposit (fixed plus savings account facility)

6 Re investment plan deposit

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FRAMEWORK OF STUDY

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INTRODUCTION- INTERNAL CREDIT RATING

In the area of credit risk, the Basel II framework allowed banks, for the first time, to use their

own estimates of certain risk parameters to determine the regulatory capital required for an

exposure.

The term ‘rating system’ comprises all of the methods, processes, controls, and data collection

and IT systems that support the assessment of credit risk, the assignment of internal risk ratings

and the quantification of default and loss estimates.

An assessment of the credit worthiness of individuals and corporations. It is based on the history

of borrowing and repayment, as well as the availability of assets and extent of liabilities.

Ratings typically include an assessment of the risk of loss due to the default of counterparty,

based on consideration of relevant quantitative and qualitative information.

Drawing up and using an intrinsic system of evaluating credit risk.

Internal ratings may incorporate customer information which is usually out of the reach of

external credit assessment institutions.

With help of rating process, debtors are distributed by classes, IT resources and complex

statistico-mathematical models of rating sustaining the experts’ opinions, and a methodology of

validation.

Internal ratings may be developed via empirical models (e.g., credit risk, scorecards) or expert-

based models. In addition, external ratings, as well as ratings from market-driven rating models,

are widely employed.

Internal rating tries to measure-

- Borrower’s probability to default (PD)

- Facility’s loss given default (LGD)

- Level of exposure at time of default (EAD)

- The credit’s expected loss (EL)

- The unexpected loss (UL)

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1- Borrower’s probability to default (PD)- The risk that a debtor does not comply

with the agreements related on principal and interest during one year; it gives the

average percentage of obligors that default in this rating grade in the course of one

year.

2- Facility’s loss given default (LGD) - It measures the loss, as percentage of the credit

volume.

3- Level of exposure at time of default (EAD) - The amount of the outstanding

financial capital during one year, or until maturity, in case maturity is below one year.

4- The credit expected loss (EL) - The amount the bank could lose, on an average,

given its portfolio of credits at a particular time period.

5- The Unexpected loss (UL) - The difference of the expected maximum loss on a

portfolio at a particular time period and EL.

Function of Credit Rating-

Well-managed credit risk rating systems promote bank safety and soundness by facilitating

informed decision making. Rating systems measure credit risk and differentiate individual credits

and groups of credits by the risk they face. It allows bank management and examiners to monitor

changes and trends in level of risk. It also allows bank management to manage risk to optimize

returns.

ADVANTAGE OF INTERNAL CREDIT RATING

- Internal ratings may incorporate customer information which is usually out of the reach

of external credit assessment institutions.

- Help the bank assess the level of risk.

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Expectations of Bank Risk Rating System

No single credit risk rating system is ideal for every bank. The attribute described below should

be present in all systems, but how banks combine those attributes to form a process will vary.

- This risk rating system should be integrated into the bank’s overall portfolio risk

management

- The board of directors must approve the credit risk rating system and assign clear

responsibility and accountability for the risk rating process

- The system should assign an adequate number of ratings to ensure that risks among pass

credits are adequately differentiated.

- Ratings must be accurate and timely

- The criteria for assigning rating should be clear and precisely defined using objective and

subjective factors

- Rating allotted should reflect the risks posed by both the borrower’s expected

performance and the transaction’s structure

- Banks should determine through back-testing whether the assumptions implicit in the

rating definitions are valid. If assumptions are not valid, rating definitions should be

modified.

- The rating assigned should be well supported and documented

Corporate governance and oversight-

It is the responsibility of the Board of Directors to approve an internal risk rating policy, which

should be implemented by the management. The Board should also exercise appropriate

oversight over the system in a consistent manner. Rating policy including criteria and procedures

must be periodically reviewed to determine whether it remains fully applicable to the current

portfolio and to external conditions.

Banks must have independent credit risk control functions that are responsible for the design or

selection, implementation and performance of their internal rating systems. Rating assignments

and periodic rating reviews must be completed or approved by a party that does not directly

stand to benefit from the extension of credit.

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METHODOLOGY USED BY BANKS FOR INTERNAL RATING

Banks are free to adopt any of the methodologies/techniques keeping in view their size,

complexity of operations and clientele base. The methodologies/techniques should be flexible to

accommodate present and future risk profile of the bank, the anticipated level of diversification

and sophistication in lending activities. However, whatever the method used, the result of the

evaluation should provide meaningful information which can be further used for effective credit

risk measurement and management of the credit exposure at an individual level as well as at a

portfolio level.

A number of rating techniques and methodologies have evolved over time. The methodologies

range from a spectrum of purely expert/professional judgment taking into account only

qualitative factors, to a sophisticated statistical model based methodology solely taking into

account the quantitative factors, yet neither of the two extremes is advisable.

An ideal internal risk rating system is based on both quantitative and qualitative factors

concluding the decision based on many different attributes, involving the human judgment.

The degree of usage of qualitative factors depends on the quality and frequency of the

quantitative information, the model used by the banks and the modalities of the products.

For an optimal internal rating system, the human judgment, experience and general

considerations become more important than any mathematical methodology used. The

mathematical models should be used prudently. So, a proper weight-age should be given to such

qualitative factors. Banks based on their portfolios, clientele and products, may use the

qualitative and quantitative factors with a varied degree in their different rating models.

However, the main objective should remain the same to quantify the risk of obligor in an ordinal

way.

A rating methodology may be used based on asset class/product lines, e.g. corporate

loans/consumer finance or based on line of credit, e.g. for over draft/running finance etc. Within

each asset class, a bank may utilize multiple rating methodologies. However, these methodology

adopted should be able to be integrated in overall risk management system (the ratings developed

by different methods should be comparable with each other). When multiple rating systems are

used, it is required that, the rationale for assigning a borrower to a rating system must be

documented and applied in a manner that best reflects the level of risk of the borrower.

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The ultimate objective of internal rating system should be to generate accurate and

consistent risk ratings. This process must provide for a meaningful differentiation of risk,

grouping of satisfactory exposures, and must allow for accurate and consistent estimation of loss

characteristics at pool level.

The internal risk rating system should be integrated with other systems of the banks such

as portfolio monitoring, loss reserves analysis for provisioning, internal capital planning and

return on capital analysis. Banks should use same rating systems for lending purposes, risk

analysis and capital allocation.

Risk rating (Indian Bank)

Taking into account the RBI’s guidelines on credit risk management, Indian Bank established

seven internal rating models for different segments and use the Moody's Rating model for

borrowal accounts with credit limits of Rs. 10 million and above in the manufacturing segment.

Indian Bank adopted credit risk ratings in 9- point scale in their internal models and 7 grades of

rating under the Moody's risk rating model. Standard borrowal accounts with exposure of Rs.

200,000 and above are brought under the purview of rating exercise. Exposures below Rs.

200,000 and specific segments, such as Loan on Deposits, Jewel Loan and Agriculture credit are

rated under portfolio approach.

Internal rating is done separately for Retail customers (credit scoring) and Small and big

corporates (risk rating).

Credit scoring is most often used in the retail banking segment, while the term “risk rating” is

used in wholesale banking units to define the same process of producing risk ratings for

counterparties.

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Scope of internal rating-

All banks are required to assign internal risk ratings across all their credit activities including

consumer portfolio. The internal risk ratings should be based on a two tier rating system.

Obligor rating- This rating is based on the risk of borrower default and representing

the probability of default by a borrower or group in repaying its obligation in the normal course

of business and that can be easily mapped to a default probability bucket.

Facility rating- It into account transaction specific factors, and determine the loss

parameters in case of default and representing loss severity of principal and/or interest on any

business credit facility. This rating is oriented to the loss severity of principal and/or interest on

any exposure.

Rating grades/ Structure-

The appropriate number of credit risk grades is an important feature of any internal risk rating

system. The number of grades assigned should be such that a bank has a meaningful distribution

of exposures across grades, on both its borrower-rating and its facility-rating scales.

For obligor ratings, the banks should have at least nine credit risk grades for non-defaulted

borrowers and three for defaulted borrowers.

Rating grades Introduction

1 Credit exposure is of the highest quality and has minimum credit risk.

This rating should be assigned only when the creditor’s capacity and willingness to

meet its financial obligations in time is extremely strong and is unlikely to be

adversely affected by the economic or foreseeable events.

2 Very good quality creditors that are lower than grade 1 in only small degree and

denotes somewhat larger credit risk than grade 1 creditors.

The obligor’s capacity to meet the financial commitment on the obligation is very

strong and is not significantly vulnerable to foreseeable events.

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3 Good quality creditors, whose capacity to meet their financial commitment to the

obligation is still strong, however there are elements present, however minor, which

may suggest a susceptibility to impairment in the future.

This category is more susceptible to adverse effects of changes in circumstances and

economic conditions than obligations in higher rated categories.

4 medium quality obligor and bears average security and certainty of timely fulfillment

of financial obligations

5 Assigned to the lower medium quality obligor, whose future cannot be considered as

well assured. Such customers bear high risk associated

with their capability or willingness to fulfill their financial obligations

6 This rating is given to poor quality creditors.

Fulfillment of financial obligations over any longer period of time may be uncertain.

7 Obligors graded 7 are of poor standing and there may be elements of danger with

respect to fulfillment of their financial obligations.

They are currently vulnerable to nonpayment, and their capability to meet financial

obligations is dependent upon favorable business, financial, and economic conditions.

8 The capacity of the obligor to meet its financial commitments is currently highly

vulnerable and at any time may discontinue its payments.

9 Obligor bears the highest default risk exposure and is virtually in default but payments

on the obligations are still continued.

Even the positive development of the business, financial and economic conditions

need not mean its capability to meet its financial obligations.

10 denotes substandard loans as defined by SBP from time to time

11 denotes doubtful loans as defined by SBP from time to time

12 denotes loss category as defined by SBP from time to time.

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RESEARCH METHODOLOGY

Credit rating- An assessment of the credit worthiness of individuals and corporations. It is based

upon the history of borrowing and repayment, as well as the availability of assets and extent of

liabilities.

Ratings typically embody an assessment of the risk of loss due to the default of counterparty,

based on consideration of relevant quantitative and qualitative information.

Drawing up and using an intrinsic system of evaluating credit risk.

Problem statement-

To study internal credit rating process implemented in Indian Bank

Objective of study-

- What is internal rating

- Why is internal rating done in banks

- Factors considered for Internal Rating/ Scoring

- Advantages of internal rating

- Rating for retail and SME loans

RESEARCH TYPE: Exploratory

Coverage-

The research was conducted at branch level. (Indian Bank, Kirkee branch, Pune)

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Data collection-

Secondary Data-

The data/ information which is collected is secondary in nature as all the information needed was

system based or was as per the guidelines of Bank.

- Books,

- Bank circulars,

- RBI guidelines on Internal rating of loan

- Bank’s official website

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Why banks do their own internal rating?

- Differing views on the appropriate degree of reliance on quantitative (i.e., measurable) as

opposed to qualitative (i.e., difficult to measure) risk factors;

- The importance of each institution’s individual credit culture and historical experience, in

light of the close connection between rating systems and credit risk management

processes more broadly;

- Differing judgments regarding the complexity and opaqueness of the risks associated

with each transaction;

- Differing responses to the inherent difficulties associated with quantifying loss

characteristics, and

DEVELOPMENT IN BANKS RISK RATING METHOD-

Development of robust internal risk rating processes to increase the precision and effectiveness

of credit risk measurement and management. Banks tries to implement advanced portfolio risk

management practices and improve their processes for measuring and allocating economic

capital to credit risk. Further, expanded risk rating system requirements are anticipated for banks

that assign regulatory capital for credit risk in accordance with the Basel Committee on Bank

Supervision’s proposed internal-ratings-based approach to capital.

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CREDIT SCORING (RETAIL LOAN RATING)

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Credit scoring-

Introduction

Credit scoring is used in the retail segment, and has been for several decades in the more

mature banking markets. Typically, this segment comprises a large number of customers with

similar characteristics or product requirements. The availability of large amounts of internal and

external (i.e., credit bureau) data enables the development of scorecards using predictive

modeling techniques. Several statistical methods may be used, with logistic regression being the

most popular. A credit score is based upon information drawn from an individual’s credit report.

Scoring is done in following cases

- Application scoring for new customers or for customers requesting a certain product for

the first time.

- Behavioral scoring for customers who already have a credit history with the institution.

The score can be used in various credit risk management contexts. Application scoring is

relevant for the following types of decisions:

Risk-based pricing/

Down payment/

Deposit.

Loan limit.

Cross-sell/up-sell offers.

Product upgrade/downgrade.

Due diligence optimization

ATM limits

Payment terms.

Regulatory/economic capital.

The credit score is linked to a probability of default, which can then be used for portfolio

modeling, pricing and capital allocation purposes.

Generally, the scoring process itself is fully automated, which makes it inexpensive. For the most

part, scorecards are easy to understand, and scoring outputs are easily interpreted.

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How scoring is done-

These days credit scoring is totally software based system.

Details about the customers are entered into system and score card is generated by system.

For further clarification a sample of the data entry portal and score card is attached.

Branch :  ******* ---- SPECIMEN OF SCORE CARD----- CBS Code : *****

SCORING REPORT - Home Loan

Reference No : ******* Branch Code : *******

Mr. XYZ Circle   : PUNE

Address- Branch : ******

Status : Fresh

Detailed Scoring Information

Sl

NoParameter Value Score Max Score

1 Capacity To Repay 1.01 15 30

2 LTV Ratio 0.77 10 20

3 Life Style Index 1.25 4 10

4 Networth to Loan Ratio 1.84 5 5

5 Occupation M N C 3 3

6 Qualification PG and Doctorate 3 3

7 Stability Of Income Steady increase - last 3 years 2 2

8 Age of Borrower 31 2 3

9 Designation Executive 2 2

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10 Location Movement No Change 2 2

11 Relationship with our Bank No existing relation 0 3

12 Marital Status Married 2 2

13 Marketability Of Property Very Good 3 3

14 Purpose Of LoanConstrucion/Takeover/Purchase

of new flat or house3 3

15 Mode of Repayment Deduction at Source 3 3

16 Proof Of Income Salary Slip 2 3

17 Repayment Tenor Above 20 years 0 3

TOTAL SCORE 61

MAXIMUM SCORE 100

Signature RATING BBB

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SME RATING – RAM RATING

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SME RATING MODEL-

Software driven rating / scoring models (Risk Assessment Model – RAM) for different

segments are in place since 1st April, 2008.

Risk assessment model- RAM

RAM is a internal rating software designed to assist a bank in complying with the requirements

under the internal ratings-based approach of the Basel II. RAM helps in credit risk appraisal of a

borrower through a judicious mix of objective and subjective methodologies and acts as a

comprehensive database for all borrower-specific information.

RAM is widely used as internal risk rating solution in India.

Features-

Standardization and automation, ensuring a robust rating process

Two-dimensional rating approach (Borrower & Facility Rating)

Estimation of probability of default

Capturing relevant default, loss and recovery data for Loss given Default (LGD) and

Exposure at Default (EAD) estimation

Ability to host multiple models, including bank's existing rating models

Loan Origination System

Credit Administration

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Rating criteria:

To ensure that banks are consistently taking into account available information, they must

use all relevant and material information in assigning ratings to borrowers and facilities. They

must take into consideration the maximum available attributes of an obligor; financial as well as

managerial, quantitative as well as qualitative. They should also make optimal use of market

generated information.

In order to assign obligor ratings the banks are required to consider, but not limited to, the

following aspects of the borrower:

Financial Condition

- Economic and financial situation

- Leverage

- Profitability

- Cash flows

Management and ownership structure

- Ownership structure

- Management and quality of internal controls

- Assessment of the willingness to pay

- Strength of Sponsors

Qualitative factors:

- CIBIL report

- Sector of business

- Industry property and its future prospects

Others:

- Country risk

- Comparison to external ratings.

- Credit information from other sources

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In order to assign the ratings, the bank should take in consideraton the relevant and material

information including-

Facility

- Nature and purpose of loan

- Loan structure

- Product type

- Rights in case of bankruptcy

- Degree of collateralization

- Composition of collateral

Collateral

- Nature

- Quality

- Liquidity

- Market value

- Exposure of the collateral to different risks

- Quality of the charge

- Legal status of rights

- Legal enforceability

- Time required to dispose off

In the case of credits to individuals, factors such as personal income, debt burden should also

be considered. Although the qualitative factors are not sometimes measurable, however, the

persons analyzing these aspects should be careful and conservative in their approach.

Banks should be vigilant about the quality and reliability of the data. Given the difficulty in

forecasting future events and the influence they will have on a particular borrower’s financial

condition. Bank must take a conservative view of projected information.

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Sample of RAM rating-

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Limitation of Study-

- Time constraint- only 8 week is not enough to understand process on internal credit rating

for loans.

- Access to data- due to privacy policy of Bank, the access to data was limited. I tried to do

the best with the available data.

Expected contribution of study-

- Understanding of retail and SME customer rating

- Understanding of issue of loans to SME and retail

- Life time experience

- Got a chance to experience banking from other side of table,

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CONCLUSION

BASEL II framework allowed banks to use their own estimates of certain risk parameters

to determine the regulatory capital required for an exposure.

Banks are free to adopt any of techniques to carry out the rating procedures, depending

on their own risk bearing capacity.

Internal credit rating by banks helped them in various ways-

- It allows bank management and examiners to monitor changes and trends in level of risk.

- Measures Credit risk

- Grading and scoring of customers

- It also allows bank management to manage risk to optimize returns.

- Promotes banks safety and soundness

- Helps n managing risk to optimize returns

- Proper assessment of loans,

- Bank need not to depend on other rating agencies for loans,

- Assessment of interest rates to be charged to different customer based on their rating,

The ultimate objective of internal rating system should be to generate accurate and consistent

risk ratings.

CIBIL plays a very important role in internal rating by banks by providing the credit history

of the customer.

Credit rating/ scoring is done using various parameters such as personal, management, financial

etc. to evaluate credit worthiness of the borrower.

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BIBLIOGRAPHY

Books/journals-

1- Credit risk rating- (comptroller’s Handbook) april 2011

2- Guideline on internal credit rating system

3- Circular on Internal rating of Retail Loan

4- Circular on internal rating of SME loan

5- Journal on RAM rating by CRISIL

6- Impact of internal rating on NPA

Website-

1- www.indianbank.in

2- www.crisil.com

3- www.rbi.org.in

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