how to compute credit risk grading (CRG)

 The following stepwise activities outline the detail process for arriving at CRG

Step.1. Identify all the principal risk components

Credit risks for counterparty arises from an aggregation of the following:

* Financial Risk

* Business/Industry Risk

* Management Risks

* Security Risks

* Relationship Risks

Step ii.  Allocate weightages to principal risk components

According to the importance of risks profile, the following weightages are proposed for corresponding principal risks

principal risk components	Weight (%)
*Financial Risk	50
*Business/Industry Risk	18
*Management Risks	12
*Security Risks	10
*Relationship Risks	10

Step iii & iv. Establish the key parameters and assign weightge to each of the key parameters

 

principal risk components	Key parameters	Weight (%)
Financial Risk	50
	leverage	15
	liquidity	15
	profitibility	15
	coverage	5
Business/Industry Risk	18
	Size of business	5
	Age of business	3
	Business outlook	3
	Industry growth	3
	Market competition	2
	Entry/exit barriers	2
Management Risks	12
	experience	5
	succession	4
	Team work	3
Security Risks	10
	Security coverage	4
	Collateral coverage	4
	support	2
Relationship Risks	10
	Account conduct	5
	Utilization of limit	2
	Compliance of convenants/condition	2
	Personal deposit	1

 

Step v. input data to arrive at the score on the key parameters

After the risk identification & weightage assignment process, the next steps will be to input actual parameter in the score sheet to arrive at the score corresponding to the actual parameters.

Step vi. Arrive at the credit risk grading based on total score obtained.

 

number	Risk grading	Short name	score
1	Superior	SUP	*100% cash covered *government guarantee *international bank

 

			guarantee
2	Good	GD	85+
3	Acceptable	ACCPT	75-84
4	Marginal/watchlist	MG/WL	65-74
5	Special mention	SMA	55-64
6	Sub-standard	SS	45-54
7	doubtful	DF	35-44
8	Bad & loss	BL	<35

Different aspects of Credit Risk Grading (CRG) with grading points Or, Write down the components of CRG. Or, Number and Short Name of Grades Used In the CRG

Number and Short Name of Grades used in the CRG:

Grading	Short Name	Number
Superior	SUP	1
Good	GD	2
Acceptable	ACCPT	3
3 Marginal/Watch list	MG/WL	4
Special Mention	SM	5
Sub standard	SS	6
Doubtful	DF	7
Bad & Loss	BL	8

Superior:

- Credit facilities, which are fully secured i.e. fully cash covered.

- Credit facilities fully covered by government guarantee.

- Credit facilities fully covered by the guarantee of a top tier international Bank.

Good:

- Strong repayment capacity of the borrower

- The borrower has excellent liquidity and low leverage.

- The company demonstrates consistently strong earnings and cash flow.

- Borrower has well established, strong market share.

- Very good management skill & expertise.

- All security documentation should be in place.

- Credit facilities fully covered by the guarantee of a top tier local Bank.

- Aggregate Score of 85 or greater based on the Risk Grade Score Sheet

Acceptable:

- These borrowers are not as strong as GOOD Grade borrowers, but still demonstrate consistent earnings.

- Borrowers have adequate liquidity, cash flow and earnings.

- Credit in this grade would normally be secured by acceptable collateral (1st charge over inventory / receivables / equipment / property).

- Acceptable management

- Acceptable parent/sister company guarantee

- Aggregate Score of 75-84 based on the Risk Grade Score Sheet

Marginal/Watch list:

- This grade warrants greater attention due to conditions affecting the borrower, the industry or the economic environment.

- These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings.

- Weaker business credit & early warning signals of emerging business credit detected.

- The borrower incurs a loss

- Loan repayments routinely fall past due

- Account conduct is poor, or other untoward factors are present.

- Credit requires attention

- Aggregate Score of 65-74 based on the Risk Grade Score Sheet

Special Mention:

- This grade has potential weaknesses that deserve management‘s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower.

- Severe management problems exist.

- Facilities should be downgraded to this grade if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage),

- An Aggregate Score of 55-64 based on the Risk Grade Score Sheet.

Substandard:

- Financial condition is weak and capacity or inclination to repay is in doubt.

- These weaknesses jeopardize the full settlement of loans.

- Bangladesh Bank criteria for sub-standard credit shall apply.

- An Aggregate Score of 45-54 based on the Risk Grade Score Sheet. Doubtful: - Full repayment of principal and interest is unlikely and the possibility of loss is extremely high.

- However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss.

- Bangladesh Bank criteria for doubtful credit shall apply.