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Credit rating scale chart and factors affecting moodys credit proposal policy compliance – Here is all you need to know about credit rating.
For every credit, there must be information of legal policies in force within the period of request.
Credit Rating Scale Chart
The lending policy might not in so many ways allow extending credit rating scale chart to certain business like gambling or businesses that are illegal.
This tell about the efficiency in the credit risk management in many banks today.
It must also be ensured that the request are consistent with the borrowers limit requirement; neither does it undermine the company’s subsidiary relationship regulation.
The factors affecting credit rating scale proposal policy compliance may come from activities both outside and inside the financial industry.
However, the limit of lending afforded to all the merchant bank is 50% of its total shareholders fund unimpaired by losses, while that of commercial banks is 20% which must be strictly adhered to.
The limit also applies to a holding companies as well as all its subsidiaries.
Credit Rating Scale Chart Of A Borrower
For any credit to be advanced to any company, first things first, the credit rating scale chart of the company would first be considered.
This is mainly to know how the company is performing in the industry that it belongs to.
Records of the company’s performances are kept for future references, and in the case of extending credit, these recorded performances will be considered.
This particular information is usually obtained from independent rating agencies like Augusto & Co., CMC International etc.
However, in countries where information technology is still very low, it will not be widely accepted due to its complicated nature.
Also an in house rating of the industry as well as the borrowed based on both financial factors and other non financial factors which are of much importance to the lender.
Terms And Structure Of Credit Rating Scale Chart
The information contained in this section of the transaction has to provide the amount required, the purpose in which the credit is being used for it.
It would also have to indicate whether the proposal is for a new facility or an existing facility in which case a renewal or an increase in volume or any other modification is being asked for.
The term of the credit rating scale must as well be specify on the pricing condition of the facility particularly the charges and also the commission rates used.
It must also give in details the supposed default on the credit rating agencies and also state the penalties associated with those who failed to repay within the specified period of time as stipulated on the contract.
Macroeconomic And Conditions Of The Concerned Industry
Another important thing to consider is to first identify with the importance of analyzing the macroeconomic environment when dealing with the credit rating scale chart.
Is it favorable to the industry? What about the political situation in the country? All the above questions must be answered with positive results.
A thorough analysis of the industry must be done.
The important key areas must be reviewed especially the strategic position of the industry to the economy, relations, competition, problems and risk, success factors and the like.
Corporate Credit Rating Profile
Corporate profile can be divided into market positions, this sub division are ownership and management.
The market position will provide enough information with respect to date of incorporation of the business, then the age of the institution, capitalization of the institution, corporate and other significant holdings in its equity capital.
It deals with problems of product development, market shares and technical alliances for manpower and technical synergy.
More importance is the ability to reach cheap and stable funds, branch network, capacity building and information technology (HT).
The company must as a matter of fact provide adequate information to show the ownership structure of both the local level as well as the international level.
A well organised company must be properly distinguished from those that are privately owned. Key man risk and family must be given due consideration as well.
The ability of the board members must be checked at all times to ensure that at the end they will record a high returns.
Regular check of the document of the board member with view to assessing their experience in the industry, influence and also their deals in the inside and outside of the industry.
The track records of the key officers responsible for the affairs of the business must be known in order to establish the credentials of the top management staff in term of quality and experience.
Adequate Capital Provisions On Credit Rating Scale Chart
Banks stock in trade is money which subject to changes in social, political and economic conditions, therefore a financial institution need to be adequately capitalized in order to prevent its collapse in the event of unforeseen losses.
The main aim of having capital in a business is to provide a safety ground for the assets of the business against any undesirable event and other incidentals in its liability structure as well as against the risk inherent in the terms which the recorded assets are directly funding.
Capital must be adjusted against deferred loses being carried in the balance as profit and loss instead of being applied directly against reserves.
For the purpose of clarification, capital is grouped into two categories, namely;
Category A – Category A consist of the primary cash as well as other permanent capital items like paid up capitals, excess paid in capital, statutory reserves profit and loss, General reserves and retained earnings.
The grand total of category A should be adjusted by the amount of deferred losses carried in the books of account of the concerned organisation.
Category B – this is the secondary capital items which are permanent in nature but are temporary capital items, these includes Revaluation surplus, Exchange Difference Reserve and Long term loans.
The revaluation surplus of real estate is only peculiar to bank operating in inflationary economies while Exchange Difference reserves resulting from the valuation of foreign assets are peculiar to countries having exchange rate instability.
The last item to be deducted from category B capital is the compny’s investments in associated companies and unconsolidated subsidiaries, as these might turn lost in the event of failure of the company concern.
Due to the important role played by capital, the regulation insists that the category Bcapital must not be greater than that of category A (both Adjusted).
Where this is not met, the company is by control barred from declaring dividends.
The central Bank may require the shareholders to inject fresh capital or in the alternatives revoke its operating licence.
The total adjusted capital is also compared with the average amount of loans to establish its cover of the company’s exposure in the risk assets.
From the Central Bank’s stand point, a bank must keep a minimum of 10 cent of capital for every one Dollar of loan (Net) in its portfolio.
Balance sheet assets are weighed on the basis of perception of the risk associated with each item and the risk weighted assets is obtained on the aggregation of the emerging values.
The Central Bank advises the bans on the figure to be attached to each item on the balance sheet.
Quality Of Earnings And Sustained Ability On Credit Rating Scale Chart
The rate and growth of gross earning and particularly, the ratio that gross earning bears to the institution’s total balance sheet assets and contingents over the period under assessment indicate that the level of assets utilization as well as the potential/current earning capacity.
Given that all the assets institution, both monetary and non monetary, this provides an insight into how far the institution has been able to use these resources to generate income.
The net incomes margin which relates to the level of Net Revenue from funds with the total amount of interest and discount incomes indicates the quality of its earning assets and the extent of the institution’s share of stable and low cost deposit, which is an important requirement for the sustenance of its profit level, in the long run.
Net revenue from fund is obtained after the interest on discount and loan loss expenses have been taken off from the amount of interest and discount income.
The make up of a Net Earning is very important issue, all other income include, lease income and others.
In a situation where the net revenue from the fund is greater than all other sources of income there is the tendency that the level of the profit will not be sustained if competitors enter the market as profit will be narrowed down.
It is better and safer where earnings are diversified.
Liquidity Of The Institution
The regulatory liquidity requirements operative now is 40% which a lender bank must meet. Any violation of this attracts penalty from the regulatory body.
The net level of loans and leases is compared to the level of domestic currency deposits for which a maximum of about 70% should not be exceeded. It simply shows that the shareholders fund is not left to play its traditional role as providing safety, but has rather been applied for the loan booking.
The makeup of the domestic currency deposit base of the institution is also analysed into its various components that is demand, saving, Time deposit as well as inter-bank business.
The analysis gives an indication of the coat of funds, the stability of the deposit base and the ease with which deposit can be generated.
Demand deposit constitutes the easiest sources of funding but very volatile. Savings deposit is relatively cheap but it is a stable source of funding. Time deposit is more expensive source of funds.
Interbank business is a way of funding liabilities when it is difficult to generate other cheaper sources of deposit like savings and time deposit.
The maturity profile of the deposit is also matched with that of the loans and advances and a funding gap analysis is done.
Several implications can be drawn from the results and could possibly be related to the capital of the institution to examine the stress on its capital should there arise a situation of unexpected loss of deposit mobilization capacity.
The efficiency of the management of an institution is determined by its ability to utilize all the available resources as its disposal in generating earnings for the shareholders.
The important ratios and information used to determine management efficiency include the ratio of operating expenses to Net earnings on the institution’s profitability.
A parallel translation of this is the ratio of profit before tax (PBT) to gross earnings, which speaks the same thing, that is how much of every Dollar of gross earning has the institution successfully converted into profit.
Credit Risk Scale Chart And Solutions
The credit rating risk is inherent in financial institution are those of before and after settlement as well as settlement risk, most times experts prefer situation where a credit rating scale chart manual is consulted before any sort of settlement is considered.
The pre-settlement risk relates to the possibility of collapse, insolvency or distress of the borrowing institution before repayment of the borrowed fund is due.
This depends on the strength of the institution as perceived in the foregoing analysis, this might be ignored altogether or ask for collateral to assist reduce the risk that might be involved, this is exactly how banks do manage their credit risk as well as credit rating scale chart.
This is concerned with the risk of non payment by the borrowing institution as the obligation becomes due.
In the case of credit rating scale chart being backed by the investment in papers like treasury bills, Bankers Acceptance of Commercial papers, this risk is naturally mitigated by the virtue of possible fallen back to the issuer of the notes should the borrower defaults in repayment of debt.
Income Analysis And Projection
One of the major purpose of every credit rating scale chart relationship is mainly to help generate income for both the already established relationship as well as any new one.
A projection of an expected income from the relationship to be established is presented to the approving authority.
The income that has been meant to be generated might as well include foreign exchange income, commissions from sundry items, commission on turn over, and also other charges related to the credit.