LOAN PRICING & CREDIT RATING

SEPTEMBER,2013

LOAN PRICING
Main constituents :
Cost of Funds Servicing costs Risk Premium Deposit mix Retail / Wholesale loan External Rating / Internal Rating

Desired profit margin Shareholders expectation * Capital / Assets

BPLR / BASE RATE

BPLR : Banks Prime Lending Rate
Cost of funds + Admin cost + Profit margin

Base Rate : Minimum rate at which Bank will lend

CREDIT RATING - INTERNAL

After analysing the financial statements and due diligence of the facts gathered, the conclusion reached have to be put together and evaluated in a holistic manner to arrive at a meaningful decision. Each of the factors have to be viewed in the right perspective and given the weight age it deserves. Notwithstanding absolutely wonderful financial ratios, a company may have to be denied credit facilities because the analysis of the management capabilities and competitive scenario reveals weaknesses.

CREDIT RATING - INTERNAL

Credit Rating system is developed by studying the data relating to a large number of accounts and their performance in the past. All the variables which have predictive value in assessing the future performance of a company will be identified and appropriate weight ages assigned to each of them. Each of the factors may be assessed on a scale of 1 to 5, 1 being the best and 5 being the worst. Depending upon the weight ages, the aggregate score is then used to arrive at the final rating of the borrower.

CREDIT RATING - EXTERNAL

I. Analysis of financial statements may give a good account of a company. II. Their growth over the years may be better than their peers and the company may appear to do well on all parameters. III. However, if the industry or the economy is at the peak of a business cycle and a decline is imminent, it may not be prudent to take on or increase the exposure.

CREDIT RATING - EXTERNAL

IV. The status and the prospects of industry must be studied carefully before taking a lending decision. V. Reports of investment analysts and industry studies easily accessible on the web can be rich sources of information to take a balance credit decision. VI. The websites of brokerage houses like ICICI Direct, India Infoline etc., The Credit Rating agencies like CRISIL, ICRA and data companies like CMIE are good sources of information on industries and companies.

THANK YOU