What is Risk Rating? February 11, :00 to 11:00

What is Risk? Means danger, a peril, an uncertainty, a threat, a probability. Is the adverse effect on profitability of distinct sources of uncertainty.

Requirements for Risk Management All risks generate potential losses; Risks need to be identified in order to measure, monitor and control them Risk management requires a set of tools and techniques, management processes and organizational design to identify, monitor, measure and control them.

Risk management requires: A set of tools and techniques, Management processes; and Organizational design to identify, monitor, measure and control risks. Now, the call of the times is for RISK-BASED LENDING!

What is default? z Past due more than 90 days z Bankruptcy z Failure to pay the loan balance z Bank estimates that the client is unlikely to pay its obligations. z Other industry-specific definitions

Analyzing & measuring risks - BRR & FRR System Basel II recommends a two-tier rating system – one that uses BRR- Borrower Risk Rating and FRR – Facility Risk Rating. Involves qualitative and quantitative evaluation.

A Proven Working Model: SB’s BRR System A tool to systematically assess the risk factors involved in a business applying for a loan. There are clear guidelines & definition of terms. Risk assessment is made on the customer, and then a BRR rating is computed based on the assessment. Low risk=low probability of default, while high risk = high probability of default.

SB’s Model The BRR recommended by SBC makes use of CAMP analysis. CAMP stands for Cash, Management, Marketing and Production. A scale of 10 is used, where 1 means very low risks and 10 is very high risk and ripe for collection.

SB’s Model Administration: Experience of owners / management > more than 15 years 5 >15 but not less than 5 years 3 > 5 years 0 5 Owner’s health, age & succession > 50 y/o with succession plan 5 > 50 y/o with no succession plan 3 <50 y/o with succession plan 3 w/ health concerns & succession plan 3 <50 y/o with no succession plan 0 w/ health concerns, no succession 0 5

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

SB BRR: Market Clients (concentration of sales) No client <10% of sales client bet.10% to 20% of sales 4 <1 client over 10% or 1 client over 20% 27.5 Increase of sales (ave. of last 3 yrs.) > 10% 7.5 > 5% increase not > 10% 5 < 5% or stable 2 Decreasing sales or insufficient data Maximum points / Sub-total 15.0

SB BRR: Production Suppliers Concentration No supplier4 No supplier more than 20% 3 1 supplier bet. 20% & 30% 2 <1 supplier over 20% or 1 supplier over 30% 1 4 Inventory No inventory/ Fast-moving invty. 4 Inventory level acceptable for type of industry 2 Slow-moving inventory/Perishable and/or high tech 04

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

SB BRR: Cash Current Ratio (excl. past due ARs and obsolete inventory) Current Ratio > > CR < < CR < 2 3 CR < Debt-Equity Ratio (DER) DER < 50: :50 < DER < 67: :33 < DER < DER < 75:2507.5

SB BRR: Cash Debt-servicing capacity DSC > < DSC < < DSC < DSC < Accounts receivable level AR < 90 days 5 90 days < AR < 180 days 3 AR > 180 days 0 5 Maximum Points/Sub-total 50 Maximum Points/Total Score 100

SB BRR Maximum Points/Total Score100 Bonus Point for BIR FS-Based Evaluation 3 Final Score Passing Attained Risk Mark Mark Quality Borrower Risk Rating Fair Risk

Conversion Table BRRDescriptionScoreRisk Quality 1Excellent>89Very low risk 2Strong80-89Low risk 3Good70-79Moderate risk 4Fair60-69Moderate risk 5Acceptable55-59High risk 6Marginal50-54High risk 7Unsatisfactory45-49Very high risk 8Substandard40-44Very high risk 9Doubtful35-39Very high risk 10Expected loss<35Very high risk

Thank you!