Credit Modelling/Analysis:

Learning Outcomes-

• Practical demonstration of how credit is extended in corporates

• What are the different evaluation metrics used while extending and approving credit

• Which are the various red flags that can be identified in a company’s financial statements
& annual reports

• Parent Support significance (Obligor level support vs facility level support)

• Purpose of using Company Internal ratings

Evaluation metrics used while extending/approving credit

• Cash Flows

• Net Worth

• Equity infusion

• Group Borrowing

• Liquidity

• Parent Support

• Leverage ratio

• Debt Repayment Capacity (ratios)

Checklists & Red flags
Early Warning Checklist

• Operations Shutdown
• Operations Outside the core business
• Significant Industry Downturn
• Current or anticipated negative FX impact that suggest company may cut back or
shutdown local operations?
• Parent Classification downgrade
• More than 25% increase in debt
• Significant reductions in flow volume
• Significant change in client base
• Significant change in credit period extended by suppliers as per discussion with client?
• Has any other bank cancelled credit lines to the client since last follow-up review?
• Any reference to BIFR since last follow-up review?
• Timely servicing of interest & principal
Unhedged foreign currency exposure
• In addition to the standard provisioning for banks,
there is an additional provisional for unhedged
foreign currency exposure that has to be maintained.
• Provisioning increases as the liabilities keep rising
• Depreciation in the local currency against the USD
can significantly affect the repayment capacity of the
client.
• Hence volatility is considered as an important factor
– eg. USD – INR volatility
• Adjoining table shows the various provisioning rates
for various levels of likely loss

Steps in Computing Provisioning

• Compute UFCE
• Likely Loss = Volatility * UFCE
• Likely Loss as % of EBID
• Provisioning
Working Capital Analysis
Working Capital is defined as the difference between current assets (excluding Cash) & current
liabilities of the Company
For lending purposes, corporates often consider only certain items as part of current assets &
current liabilities

Current Assets – Inventories, Trade Receivables, Balances with Government authorities, Advances
to suppliers / vendors, Advances made to customers, other statutory accounts/assets, export
benefit receivables etc.

Current Liabilities – Trade Payables, Statutory Dues, Advances from vendors, Advances from
customers, import duties payable etc.
Spreadsheet Analysis for an Obligor
Ways-Out Analysis

For way out analysis we generally consider the following points –

1) Cash Flows/ Liquidity of the Company – Healthy CFO, FCF

2) Access to parent funding or parent support – What kind of support does the parent provide to its
subsidiaries across the globe

3) Third Party Guarantee – If parent is not providing guarantee are there any third party guarantors

4) Support from Bank’s Main Head Office - In event of default of the parent, how does the country
bank plan to recover its money and stay afloat.
Company’s Internal Ratings

• For stakeholders within the Company e.g. the Credit Risk & Business Officers to approve the
credit

• When external rating agencies cannot be relied upon / not sufficient for analysis. E.g. stressed
credits.

• Substandard or non-performing entities (projections)

• Debt rating model is used

• Subsidiary Rating is done as per parent rating or standalone basis.