Banking Industry Offerings

Credit Scoring (Obligor Default Rating) Solution

In order to stay ahead of competition and safeguard adequately against credit risks, banks need to upgrade their risk rating systems and comply with BASEL standards. 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 (Borrower Ratings or Obligor Default Ratings {ODR}), is used to quantify the probability of default on obligation, of a borrower, during a stipulated period. These 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 ranging from the highest numerical rating, i.e., the defaulted credit transactions where the bank is expected to suffer a loss, to the lowest numerical rating, i.e., where the risk of default is the lowest and the borrower credibility is high. ODR system design aligns to BASEL standards.

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The Challenge

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 officer.

What We Offer

We have developed separate risk rating systems for SME and corporate 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 scenario. Some banks have attempted to address these issues with stopgap measures such as splitting the existing risk grades subjectively or separating collateral effects and risk ratings. These approaches are not considered as the best practices of credit risk management or the BASEL II Advanced Internal Ratings Based Benefits of Credit Scoring (Obligor Default Rating).

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The Benefits

  • 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

Testimonials

Clients

Nesbitt Burns Inc, Toronto, Canada

Providian Financials, US

Citibank, US

Contact Us

Email:
banking@kumaran.com

Phone:
1-800-kumaran