Credit Scoring (Obligor Default Rating)

There is a great need for global banks to upgrade their risk rating systems and comply with BASEL standards. Adopting these measures ensures that they stay ahead of competition and have adequate safeguards to deal with credit risks. These risk rating systems are intended to assist banks in estimating the Probability of Default (PD) of loans at the time of their sanction or commitment to sanction. The PD, which is also known as Borrower Ratings or Obligor Default Ratings (ODR), is used to quantify the probability of a borrower defaulting on his or her obligations during a fixed period of time. They are recorded in a numeric risk rating format to reflect the level of default risk associated with borrowers. The rating system ranks the borrower's credit quality or risk of default on a scale from the highest quality or lowest risk of default (that is, lowest numerical rating) to defaulted credit transactions where the bank expects to suffer a loss (that is, highest numeric rating).

Business Challenges That You Face

Today, banks are struggling to address these fundamental questions and challenges:

• How many risk rating grades should the bank have?
• What is an appropriate distribution of loans across the risk-rated grades?
• There are no automated systems to validate or give out warning signals prior to sanction, indicating the deficiencies in the credit proposals.
• Risk Rating or Obligor Rating differs from one loan officer to another.
• Time taken for risk rating assignment differs from one officer to another.
• There is no mechanism for permitting the officer or manager to override the risk rating with justifiable reasons.
• The sanctioning authority cannot make changes in the rating made by the loan officers.
• ODR system design aligns to BASEL standards.

What We Offer You

Kumaran has developed separate risk rating systems for retail SME and wholesale customers to address all the challenges listed above. Having an accurate estimate of PD is important so that banks can improve the balance between risks assumed and pricing, more effectively use their capital, and also address the changing regulatory climate. Some banks have attempted to address these issues with stopgap measures such as subjectively splitting the existing risk grades or segregating out collateral effects from risk ratings. These approaches are not consistent with credit risk management best practice or the BASEL II Advanced Internal Ratings Based (AIRB) approach.

Benefits of Credit Scoring (Obligor Default Rating)

• Greater accuracy in estimating credit risk.
• Ability to more aggressively price lower risk borrowers or credits with better structures and collateral.
• Improved margins and better pricing for credit risk.
• A more accurate calculation of Economic Capital for credit risk, which requires PD and LGD as separate inputs.
• Consistency with the BASEL II Advanced Internal Ratings Based approach for credit risk.