In a credit relationship, there are two parties involved, the lender and the borrower. But the borrower uses the borrowed money in a specific time and space, subject to the control of certain specific conditions that we call the business environment, and this is the third object present in the business environment. credit relationship.
Credit risks arising from the business environment are called risks due to objective causes, including the effects of too fast and unpredictable fluctuations of the economy, unfavorable and inadequate regulatory environment, the level of macro management is weak, the inspection and supervision of the authorities is not effective. Risks arising from borrowers and lenders are called risks due to subjective causes, including improper use of loan capital, unwillingness to repay loans; the borrower’s financial capacity is weak and lacks transparency; poor management ability; Information asymmetry; underestimate the appraisal and post-lending inspection; the professional weakness of the GBE; laxity in internal control inspection.
126.96.36.199 Damage from credit risk
When credit risk severely affects the business of commercial banks, it will cause panic and fear for both depositors and maybe depositors will rush to withdraw money, causing the entire banking system to suffer. difficult. This panic greatly affects the entire economy, making purchasing power decrease, prices increase, and society destabilizes. Credit risk of domestic commercial banks also affects the economies of related countries because the integration has closely linked monetary and investment between countries.
Commercial banks facing credit risk will find it difficult to collect the credit capital granted to customers and loan interest, but the bank has to pay the capital and interest on the mobilized money when it is due, which makes the bank unbalanced. revenue and expenditure, loss of liquidity, loss of trust of depositors, affecting the reputation of the bank.
188.8.131.52 The role of credit ratings in risk management
Credit social system helps commercial banks manage credit risk by advanced methods, helps control credit level of customers, set lending interest rates in accordance with the forecast of failure probability of each customer group. Commercial banks can evaluate the effectiveness of the loan portfolio by monitoring the change of outstanding loans and classifying debts in each group of rated customers, thereby adjusting the portfolio in the direction of prioritizing resources into groups. customers have a high credit rating, that is, a safe group of customers.
Thus, credit society is very necessary and essential for business activities of commercial banks, because credit society is the basis for credit risk management, to classify lending customers and is the basis for building effective marketing strategies. As a result, it is the basis for classifying debts and making provision for credit risks.
1.1.4 Credit rating principles
The modern concept of credit society is focused on the main principles including credit analysis on the basis of the borrower’s sense and willingness to repay the loan and each loan; assess long-term risks based on the effects of the business cycle and future trends in debt repayment; comprehensive and unified risk assessment based on a rating notation system.
In the analysis of credit society, it is necessary to use qualitative analysis to supplement the quantitative analysis. Quantitative data are observations that are measured numerically, observations that cannot be measured numerically are classified as qualitative data. The analytical criteria may change in accordance with the change of technology level and risk management requirements.
1.1.5 Credit rating model
The simplest model used in credit analysis is the single-variable model. Evaluation criteria must be unified in the model. Financial ratios used in the single-variable model include liquidity ratios, operating ratios, debt ratios, income ratios, debt ratios and interest expenses. Commonly used non-financial indicators include: age of business, number of years of experience and qualifications of senior management, industry outlook. The disadvantage of the single-variable model is that the forecast results are difficult to be accurate if the evaluation criteria are analyzed and scored separately, moreover, each person can understand the evaluation criteria in a different way. different. To overcome this shortcoming, researchers have developed models that combine many variables into one value to predict business failure such as regression analysis, logic analysis, probability analysis. conditional, discriminant analysis of many discriminants.
Credit social models are used stably and can be adjusted after a few years of use when many errors between ratings and reality arise.
1.1.6 Credit rating method according to the score model
The purpose of credit society is to predict high-risk customers, not to explain why they go bankrupt, or to find answers to hypotheses about the relationship between bankruptcy probability and economic variables. socioeconomic. Modern credit socialization methods include statistical research methods based on regression and classification tree, also known as binary binary algorithm; or mathematical-based operations method to solve financial problems by linear programming, through which managers can make reasonable decisions for actions in the present and in the future.
The score model is a scientific method that combines the use of statistical research data and the application of mathematical models to analyze and calculate scores for the evaluation criteria in a single or multivariable model. The criteria used in corporate credit rating are established by group including industry analysis, business analysis and financial performance analysis. Then feed into the model to calculate the weighted score and convert the score received to a corresponding rating symbol. Thus, the factors that mainly affect the results of the credit society of the enterprise are financial coefficients, business results, internal characteristics and characteristics of production and business activities of enterprises.
1.1.7 Credit Rating Process
Based on the credit policy and relevant regulations of each bank to establish the credit socialization process. A CI process includes the following basic steps:
(1) Collecting information related to the criteria used in the analysis and evaluation, the rating information of other credit institutions related to the rating object.
(2) Analyze by model to conclude the rating. The final rating is decided after consulting the Rating Council. In the credit rating of commercial banks, the rating results are not publicly announced.
(3) Monitoring the credit status of the rated subject to adjust the rating, the adjustment information is kept. Aggregate rating results compared with actual risk, and based on the frequency with which rating adjustments have to be made to customers to consider adjusting the rating model.
1.2 Some research and experience on credit rating in the world
In order to approach the modern theoretical foundations in the field of corporate credit, the research will introduce Altman’s multivariable credit index model, applied to predict the bankruptcy of enterprises. Altman’s mathematical model of many variables can predict with relative accuracy over 90% of defaults in financial markets in developed countries such as the US and Europe. The topic presents the leading corporate credit system of the US – the leading country in the field of credit society, the credit socialization system of a number of domestic commercial banks. Thereby, the topic proposes an applied research direction to supplement the credit rating model with a variable being used at credit institutions and commercial banks in Vietnam.
1.2.1 Credit rating system of S&P, Moody’s and Fitch
Standard & Poor’s (S&P; founded in 1860) and Moody’s Investors Service (Moody’s; established in 1909) are two reputable and long-standing credit rating agencies in the United States and are also pioneers in this field. credit rating field in the world, followed by Fitch Investors Service (Fitch ratings; established in 1924). The credit rating results of these organizations are highly appreciated. As financial markets have grown increasingly complex, these three rating agencies as independent analysts have become an important part of the global financial system.
S&P’s rating system includes ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, D; shown in Table 1.1. Accordingly, S&P’s credit ratings will show the growth, decline or neutrality of the market. About $1.7 trillion in investable assets are directly tied to the name of the S&P index and more than $4.85 trillion are in S&P index values, this figure much larger than all the other stock index providers combined. The total amount of bad debt assessed by the S&P index globally is approximately $32 trillion in 100 countries.
Table 1.1: S&P and Fitch .’s long-term credit rating system
|AAA||The company has the best quality, high stability and reliability||Grade to invest|
|AA||Quality company, but higher risk than AAA grade|
|A||The Company may be affected by fluctuations in the general economic situation|
|BBB||Average company, suitable for investment at the moment|
|BB||The company tends to be more susceptible to changes in the economy in the past||Grade should not invest|
|B||The company has a volatile financial position|
|CCC||The current company is affected and depends on the economic situation|
|CC||The company is strongly affected by the current situation, bonds have unpredictable fluctuations|
|C||The company is strongly affected by the current situation, near the risk of bankruptcy, but still continues to pay its debts|
|D||The company is assessed as insolvent most of its debts|
|NR||Công ty không được xếp hạng công khai|
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The complex development of financial markets has made independent analysis and Moody’s opinions used by many investors. Moody’s Investors Service was founded in 1909 by John Moody. Currently, Moody’s has a 40% share of the worldwide credit rating market. Moody’s credit rating method focuses on four main areas: industry environment assessment, financial situation assessment, production and business performance assessment, and corporate governance assessment focusing on management risk management and internal control. The rating of the quality of long-term corporate debt instruments by Moody’s is shown in Table 1.2.
Table 1.2: Moody’s long-term debt instrument rating system
|A1||Medium quality, good solvency|
|Baa1||Medium quality, affordability|
|Ba1||Uncertain ability to pay||Speculative|
|B1||High investment risk|
|Caa1||Low quality||Possibility of bankruptcy|
|Ca||High-risk speculation||Total bankruptcy|
(The source http://www.senate.michigan.gov)