Title of Invention	"A METHOD AND COMPUTING SYSTEM FOR EVALUATING CREDIT RISK RATING"
Abstract	This invention relates to a system for assessing credit risk rating of a client with an existing business operation of at least one year, comprising: means for analysing financials, means for evaluating business position means for appraising management capability, and means for considering past conduct of account, characterised in that: said means for financial analysis includes a mechanism for subjective appraisal of the reliability of past financials, effect of future risk factors and mechanism for analysing trends in terms of direction, magnitude and variability, said means for evaluating business position includes a mechanism for incorporating the impact of future prospects of such industry segments for which said client operates. said means for considering past conduct of account includes a mechanism for measuring account performance using quantified defined adverse performance indicators. The instant invention also provides a method and computer program product for assessing credit risk rating of a client with an existing business operation of at least one year.

Title of Invention

"A METHOD AND COMPUTING SYSTEM FOR EVALUATING CREDIT RISK RATING"

Abstract

This invention relates to a system for assessing credit risk rating of a client with an existing business operation of at least one year, comprising: means for analysing financials, means for evaluating business position means for appraising management capability, and means for considering past conduct of account, characterised in that: said means for financial analysis includes a mechanism for subjective appraisal of the reliability of past financials, effect of future risk factors and mechanism for analysing trends in terms of direction, magnitude and variability, said means for evaluating business position includes a mechanism for incorporating the impact of future prospects of such industry segments for which said client operates. said means for considering past conduct of account includes a mechanism for measuring account performance using quantified defined adverse performance indicators. The instant invention also provides a method and computer program product for assessing credit risk rating of a client with an existing business operation of at least one year.

Full Text	Field of the invention This invention relates to a computing system and program product for assessing credit risk rating of a borrower. Background of the invention Credit risk rating provides for assessing the risk of a borrower failing to meet obligations towards the creditor in accordance with agreed terms and conditions. It is the risk of default on the part of borrower, which could be due to either inability and/or unwillingness to repay debts. Credit risk is associated with individual borrowers. Minimisation of credit risk requires a system to assess and manage the risk associated with individual borrowers. In addition, the terms and conditions of loans and advances sanctioned to a borrower (i.e. the price, the maturity, the form of credit etc.) determine the profit earned by the creditor. If the terms are decided without proper assessment of the credit risk, the creditor incurs losses by charging low interest rates from poor quality customers that default on repayments or charging high rates from good quality customers thereby loosing profitable business to competitors. In the emerging competitive environment a sound credit risk rating system can be a source of competitive advantage for the creditor. The inputs from the credit rating system can also be used for portfolio analysis. Credit risk depends on both external and internal factors. The external factors can be economy wide as well as company specific. Some of the economy wide factors are.  State of the economy  Wide swings in commodity prices  Fluctuations in foreign exchange rates and interest rates  Trade restrictions  Economic sanctions  Government policies, etc. Some company specific factors are: Management expertise Company policies Labour relations ['he internal factors within the creditor set up. influencing credit risk are: Deficiencies in loan policies/administration Absence-of' prudential credit concentration limits Inadequately defined lending limits for Loan Officers/Credit Committees Deficiencies in appraisal of borrowers' financial position Excessive dependence on collateral without ascertaining its quality/realisability Lack of risk pricing mechanisms Absence of loan review mechanism Ineffective system of monitoring of accounts While the creditor can influence and control the internal factors to improve quality of the credit portfolio, the risk due to external factors can be minimised by proper diversification across industries and by initiating necessary changes in the loan portfolio in anticipation of adverse developments. Development of effective risk assessment and monitoring systems helps in improving the quality of credit decisions thereby reducing loan losses on an on-going basis and gradually improving the quality of the loan portfolio. The main advantages of a credit risk-rating model are: The rating primarily assists in the taking of credit decisions, besides creating a database of borrowal accounts. The database, so created, facilitates formulation of policies related to loan approvals, necessity and extent of risk mitigants like collaterals, pricing, monitoring frequency, etc. In particular. Credit risk rating is useful in deciding the following matters: Whether to lend to a borrower or not: The credit risk rating of a borrower "determines the appetite of the creditor and helps in determining exposure level. A creditor would be willing to lend to highly rated borrowers but would not like exposure to borrowers with very poor credit risk rating. 2. Pricing: The risk premium to be charged to a borrower is best linked to the credit risk rating so that borrowers with poor credit rating are priced high. Credit rating, however, is just one amongs several inputs to pricing. 3. Risk Mitigants: The extent of collateral security required and the need to step up margin requirements are linked to credit risk rating of a borrower. The higher the risk category of a borrower, the greater should be the value of collateral and/or margins. 4. Level of decision-making: Credit risk rating helps in determining the delegation of loan sanction/approval powers. For low risk borrowers, the power of approval can be at the branch level to facilitate faster sanctioning of credits thereby ensuring better customer service. For higher risk borrowers, approval from higher levels may be required. 5. Frequency of renewal and monitoring: Renewal of facility in case of high rated borrowers can be considered at longer intervals as compared to low rated borrowers. Further, high-risk borrowers could be monitored on a more frequent basis than the low risk ones. Credit risk rating is an important input for making credit decisions, besides other factors like collateral provided, period and quality of relationship with the borrower, portfolio concentration etc. Credit risk ratings eventually help a creditor to assign a probability of default for a.borrower according to risk category This probability of default is determined statistically from past data by observing the behaviour of various clients over a number of years. The expected losses from a loan can be determined using this probability of default. This quantitative definition of credit risk helps in taking quality credit decision and its linkage to terms and conditions, amount, interest rate, maturity etc. A database of successive risk ratings, assists in the creating a default probability matrix. The accumulation of data based on individual credit risk rating helps in putting in place scentific pricing mechanism. The aggregation of credit risk in a creditor's portfolio helps in assessing the capital adequacy of the creditor to take appropriate action and in managing For banking institutions in particular, the Basel Committee on Banking Supervision issued a Consultative Paper on New Capital Adequacy framework in June 99 which was intended to replace the 1998 Accord on international convergence of capital measures and capital standards. The Committee also brought out guidelines for implementing the new framework. This accord requires every bank across the world will be required to introduce international credit risk ratin mechanisms to assess the distribution of various risk rating categories in its credit portfolio. The resultant aggregation of credit risk rating would be linked to Capital Adequacy requirements of such institutions. The has defined a time frame of three years for implementing the new Accord. The new Accord interalia stipulates two approaches, namely. Standardised and Internal Ratina Based Approach. Under both the approaches, the emphasis is laid on risk rating of exposures eitherthrough an external credit rating agency or through an internal mechanism. Credit rating for loans of commercial banks is a new concept in India. So far only a few banks have been conducting credit risk rating exercise and there is no established model to carry out credit risk rating for commercial loans in Indian conditions. US.patent 6,078.903 describes a method for assessing credit risk which requires estimation of olatility in market value of the borrower's assets to arrive at a projected risk of defaulting on payment of the credit amount. This model makes use of the market value of borrowers assets as reflected by its share price to assess the worth of the borrower's assets accurately - a situation that is not necessarily true in all markets. This model is therefore not applicable to Further, this model is not useable for those borrowers for whom market data is not available. The object and summary of the invention The object of this invention is to overcome the above disadvantages and provide a method, computing system and program product for evaluating credit risk rating independently of market valuations. To achieve the said objective, this invention provides a computing system for assessing credit risk rating comprising a central processing unit, associated memory and input / output devices, a mechanism for assessing the credit risk rating of client with an existing operation, said mechanism consisting of: a first program means, located in said memory for subjective appraisal of the reliability of past financials, effect of future risk factors, performance analysing trends in terms of direction, magnitude and variability, a second program means located in said memory for incorporating the impact of future prospects of the industry segments in which said client operates, a third program means located in said memory for appraising management capability, and a fourth program means located in said memory for measuring account performance using quantified defined adverse performance indicators, the combination of the output from said first, second, third and fourth program means resulting in a quantified assessment of credit risk rating The said mechanism for subjective appraisal of past financials provides a mechanism for using pre-defined criteria and rating determination factors to neutralise the impact of non disclosures / unreliable disclosures. The said program means to incorporate future risk factors provides a mechanism for quantification of the capacity to withstand defined future risks. The said mechanism for trend evaluation is used to assess the future risk by discounting said past financials. The said program means for evaluating position provides a mechanism for assessing market position factors and program means for comparing operating efficiency with peers. The said program means for appraising management capability uses objective and subjective assessment evaluates achievement against sales target, profit after tax, track record in execution of targets, track record in debt payment, integrity commitment and sincerity of the management and financial strength and group support of management. The said mechanism for measurement of performance of account is based on a Performance Monitoring System Rank (PMS Rank as herein described) that evaluates performance against several parameters classified under different categories on both financial and non-financial areas of operation over a defined period. The said rating determination factors comprise the level of transparency in accounting, quality of inventory, readability of debtors and quality of investment / advances to others. The said future risk factors provides impact of contingent liability, foreign exchange risk, impact of merger / demerger / expansion, cash flow adequacy and impact of diversion of funds. The said program means for analysing trends covers financial parameters of net sales, prqfit\| before tax, operating cash flow as a percentage of total debt and total current assets as a percentage of short term borrowings. The said performance index is the aggregation of the maximum score against each said category. The said program means for analysing financials provides a mechanism for assessing objective factors of gross sales growth rate, operating. profit before depreciation, interest and tax, as percentage of sales, short t erm borrowings as percentage of net sales, operating cash flow as percentage of total debt and net operating cash flow as percentage of total debt. The said program means for evaluating market position factors provides mechanism for determining competitive position, input related risk, production related risk, product related risk, price competitiveness and market related risks. The said operating efficiency evaluation program means provides operating leverage, inventory turnover, credit period allowed and credit period availed, and ratio of net sales to current assets, as herein defined. The present invention also provides a computer program product for use in the instnat computing system comprising computer readable program code stored one omputer readable storage medium embodied therein for assessing credit risk rating of a client with an existing operations of at least one year, comprising: computer readable program code means configured for subjective appraisal of the reliability of past financials, effect of future risk factors, performance analysing trends in terms of direction, magnitude and variability, computer readable program code means configured for incorporating the impact of future prospects of the industry segments in which said client operates, computer readable program code means configured for appraising management capability, and computer readable program code means configured for measuring account performance using quantified defined adverse performance indicators, the combination of the output from said first, second, third and fourth program means resulting in a quantified assessment of credit risk rating The said computer readable program code means configured for subjective appraisal of past financials provides a mechanism for using pre-defined criteria and rating determination factors to neutralise the impact of non disclosures / unreliable disclosures. The said computer readable program code means configured for incorporating future risk factors provides a mechanism for quantification of the capacity to withstand defined future risks. The said computer readable program code means configured for trend evaluation is used to asses the future risk by discounting said past financials. The said computer readable program code means configured for evaluating business position provides a m echanism for assessing m arket position factors and means for comparing operating efficiency with peers. The said computer readable program code means configured for appraising management capability uses objective and subjective assessment evaluating achievement against sales target, profit after tax, track record in execution of targets, track record in debt payment, integrity commitment and sincerity of the management and financial strength and group support of management. The said computer readable program code means configured for measurement of, performance of account is based on a PMS index generated by evaluation of performance against several parameters classified under different categories on both financial and non-financial areas of operation over a defined period. The said rating determination factors provides transparency in accounting, quality of inventory, realisability of debtors and quality of investment / advances to others. The said future risk factors provides impact of contingent liability, foreign exchange risk, impact of merger 7 demerger / expansion, cash flow adequacy and impact of diversion of funds. The said computer readable program code means configured for analysing trends covers financial parameters of net sales, profit before tax, operating cash flow a s a percentage of total debt and total current assets as a percentage of short term borrowings. The said PMS index is the aggregation of the maximum score against each said category. The said computer readable program code means configured for analysing financials provides a mechanism for assessing objective factors of gross sales growth rate, operating profit before depreciation, interest and tax, as percentage of sales, short term borrowings as percentage of net sales, operating cash flow as percentage of total debt and net operating cash flow as percentage of total debt. The said computer readable program code means configured for evaluating market position factors provides mechanism for determining competitive position, input related risk, production related risk, product related risk, price competitiveness and market related risks. The said operating efficiency evaluation computer readable program code means provides operating leverage, inventory turnover, credit period allowed and credit period availed, and ratio of net sales to current assets, as herein defined. BRIEF DESCRIPTION OF THE FIGURES The invention will now be described with reference to the accompanying drawings. Fig. 1 shows a credit rating computing system according to this invention. Fig. 2 shows the data source for the operation of this invention. Fig. 3 shows a flow chart of the operation of the invention Fig. 4 shows a flow chart of the operation of the analysis of financial performance Fig. 5 shows a flow chart of the operation of the analysis of business position Fig. 6 shows a flow chart of the operation of the management performance Fig. 7 shows a flow chart of the Preventive Monitoring System for measurement of the conduct of account. As shown in figure 1, a computing system for credit risk rating assessment using this invention incorporates a central processing unit (1.1), Display unit (1.2), Secondary Storage (1.3), System Bus (1.4) and Memory (1.5) containing Financial Analysis Means (1.6), Business Position Analysis Means (1.7), Management Performance Analysis Means (1.8), and Preventive Monitoring System (1.9). Also a company-wise audited financials database (1.10) provides the data used by the system for measuring the credit risk rating of clients. Figure 2 shows the data sources for each of the operations. Financial performance analysis (2.3). Business Position analysis (2.4) and Management Performance analysis (2.5). utilize the audited financials of the client obtained from the company-wise audited financials database (2.1) as well as subjective data (2.7. 2.8 and 2.9 respectively) supplied by the individual conducting the credit rating assessment. The conduct of account analysis (2.6) however is on the basis of the Preventive Monitoring System database (2.2) relating to the conduct of the account for each client. In addition, subjective data (2.10) is provided by the credit risk rating assessor. The movement of the PMS Index influences the credit risk rating of the client. The top level flow chart of the operation of the Credit Risk Rating System is shown in Figure 3. The credit risk rating assessor initially identifies a peer group considering all the industry segments in which the client operates (3.1). The system then extracts the peer group data (3.2) from the company-wise audited financials database and generates peer group performance measurement parameter values (3.3). A financial performance analysis is then conducted (3.4) against peer group relative parameters as well as absolute benchmark parameters using the client's audited financials data obtained from the company-wise audited financials database duly adjusted for future risk, trend evaluation & subjective assessment of financials. This analysis yields a score-A value. The business position of the client is then evaluated (3.5) against some peer group relative parameters to provide a business position score, which is adjusted for industry prospects to get Score - B. the Management performance is assessed (3.6) against defined performance parameters to generate score-C. The conduct of the client account is quantitatively measured (3.7) using the Preventive Monitoring System against defined parameters using the data obtained from the operations of the clients' account, to evaluate score-D. Finally, the 4 scores (Score-A. Score-B. score-C and score-D) are aggregated to generate the final rating (3.8). Figure 4 shows a flow chart defining the operation of the financial analysis system. A peer group comparison is conducted (4.1) with the selected peer group using the identified financial ratios listed below. Parameter Gross Sales Growth Rate (%) OPBDIT / Sales (%) Short term Bank Borrowings / Net Sales (%) Operating Cash Flow / Total Debt (%) Net Operating Cash Flow /Total Debt (%) The Gross Sales growth rate of the company -is based on compounded annual growth rate ever the past three years. An absolute comparison of financial performance is conducted (4.2) on 6 key financial ratios against specified benchmark values as shown below: (Table Removed) A Subjective Assessment of the clients financials is carried out (4.3). The purpose of subjective assessment of financials is to make an analysis of the reliability of financials furnished in the audited balance sheet. The analysis is done on the following four parameters. (Table Removed) transparency in Accounting is assessed with relevance to the clients" maintenance of accounts, accounting principles, auditor's qualifying remarks and such other factors, which are quantified and the impact thereof on the company's net worth is evaluated. The Quality of inventory and Readability of debtors data, assesses the extent of realisable value of inventory & debtors in comparison to the book value. The purpose of such evaluation is to assess the likelihood of deterioration in clients' financials. if any. The Quality of Investment is assessed on the following three parameters in sequential order 1 Quantum of Investment in comparison to the Net Worth 2 Market value of such investments in comparison to book value, erosion if any and its impact on net worth 3 Return on such investment in comparison to market return. The aggregate score obtained is used to discount the previous scores using a discounting matrix as shown below: (Table Removed) The trends of the following 4 parameters are evaluated (4.4) to assess the client's performance in the last three years. TREND ADJUSTMENT (Table Removed) The above parameters are evaluated in terms of direction, magnitude and variability. The following factors are evaluated to assess the future risk aspects (4.5) of the client's financials. Future Risk: Parameter Impact of Contingent Liability Foreign Exchange Risk Impact of merger/demerger/expansion on key financials Cash flow adequacy Impact of diversion on future financials Impact of Contingent Liability is assessed with reference to the aggregate contingent liability & the likely devolvement of such liability. The quantification of such contingent liabilities are compared to the clients' net worth to determine possible impact. The Foreign Exchange Risk, is assessed from the aspect of transaction risk and the portfolio risk and is further quantified and analysed with respect to unhedged exposure and its possible impact on net worth. The Impact of merger / demerger is evaluated on the basis of three key financial ratios: • Current Ratio • Debt/Equity ratio • ROCE The assessment is in terms of the likely ratios that may emerge at the end of the rating period compared with absolute benchmark values. On Diversion of Funds, the purpose is only to identify the reason for such diversion, as the quantum of diversion is already evaluated in the absolute comparison parameters. The purpose of the diversion of fund impacts the future risk. The aggregate weighted score of parameters under peer group assessment and absolute assessment is discounted by the subjective assessment and then further discounted by the trend assessment scores. The score so obtained is aggregated with the score under future risk assessment to arrive at score A on weighted average. BUSINESS The Business Position Assessment is conducted in terms of the Operating Efficiency and Market Position. Operating Efficiency is evaluated with respect to the peer group (5.1) based on 11 parameters of which the assessor selects the most relevant 5 parameters applicable to the industry in which the client operates. The data for comparison is derived from the peer group data. (Table Removed) * Only five out of eleven parameters are to be selected, while operating leverage is compulsory, any four other parameters are to be chosen. All parameters carry equal weight. The Market position of the client is assessed (5.2) on the basis of important / relevant parameters out of the 7 listed below. Each main parameter is derived from sub parameters that are rated individually with the assessor exercising the discretion of selecting the most appropriate sub parameters. The evaluation of each sub-parameter is done from the perspective of the client's position vis-a-vis the peer/industry in which the client operates. The average value / score of all the sub parameters determines the score for the main parameter. (Table Removed) Assessor is required to select most important parameters/ factors applicable to the industry segment being evaluated. All the parameters/ factors within the parameters carry equal weight. Assessor can select any number of factors and can add up to two additional factors under each parameter. The weighted average of the two scores shown above are adjusted for industry score, as per matrix below to determine score-B. (Table Removed) The evaluation of Management Performance is based on both objective and subjective analysis. The objective evaluation is performed (6.1) to determine the capability of management to achieve the budgeted sales & profits. The subjective evaluation (6.2) assesses the willingness of the management and its capability to run the company on the basis of 7 parameters: (Table Removed) The weighted average of all the parameters determines score-C (6.3) Figure 7 shows the Preventive Monitroring System (PMS) for measuring the Conduct of Account. The PMS scrutinizes the clients conduct of account database for the previous one year period to identify negative factors under 10 categories. Each category includes several parameters that are individually measured based on available data. The score against each parameter is aggregated for the past one year period (7.11). the parameter with the maximum aggregate score is selected from each category (7.12) and its score is used to represent the category (7.13). The scores of all the categories are totalled (7.14) to arrive at the PMS Index Score (7.15). which corresponds to a PMS Rank (7.16). The PMS Rank is finally converted to a PMS rating score (7.17). Score under A to D will be aggregated on the weighted average basis as under: Parameter Parameter weight Financial strength 40 % Business & industry 30 % Management 20 % Conduct of account 10% The system described above is referred to as PNBTRAC (Punjab National Bank Techniques For Risk Assessment of Credit). A. STATUS OF DOCUMENTATION/ SECURITY CREATION/ TERMS OF SECTION (Table Removed) B. STATUS OF FINANCIAL DISCIPLINE (Table Removed) C. OPERATIONAL & FINANCIAL PERFORMANCE INDICATORS (Table Removed) D. STATUS/QUALITY OF BILLS REALISATION (Table Removed) E. STATUS OF FEED BACK BY THE BORROWER (Table Removed) E. LEVEL OF CURRENT ASSETS & CURRENT LIABILITIES (Table Removed) G, STATUS OF SECURITY VALUE (Table Removed) H. IRREGULARITY IN THE ACCOUNT WITH US (Table Removed) I. IRREGULARITIES WITH OTHER BANKS/FIs, ETC. (Table Removed) .3. OTHER IMPORTANT DEVELOPMENTS (Table Removed) Field of the invention This invention relates to a computing system and program product for assessing credit risk rating of a borrower. Background of the invention Credit risk rating provides for assessing the risk of a borrower failing to meet obligations towards the creditor in accordance with agreed terms and conditions. It is the risk of default on the part of borrower, which could be due to either inability and/or unwillingness to repay debts. Credit risk is associated with individual borrowers. Minimisation of credit risk requires a system to assess and manage the risk associated with individual borrowers. In addition, the terms and conditions of loans and advances sanctioned to a borrower (i.e. the price, the maturity, the form of credit etc.) determine the profit earned by the creditor. If the terms are decided without proper assessment of the credit risk, the creditor incurs losses by charging low interest rates from poor quality customers that default on repayments or charging high rates from good quality customers thereby loosing profitable business to competitors. In the emerging competitive environment a sound credit risk rating system can be a source of competitive advantage for the creditor. The inputs from the credit rating system can also be used for portfolio analysis. Credit risk depends on both external and internal factors. The external factors can be economy wide as well as company specific. Some of the economy wide factors are.  State of the economy  Wide swings in commodity prices  Fluctuations in foreign exchange rates and interest rates  Trade restrictions  Economic sanctions  Government policies, etc. Some company specific factors are: Management expertise Company policies Labour relations ['he internal factors within the creditor set up. influencing credit risk are: Deficiencies in loan policies/administration Absence-of' prudential credit concentration limits Inadequately defined lending limits for Loan Officers/Credit Committees Deficiencies in appraisal of borrowers' financial position Excessive dependence on collateral without ascertaining its quality/realisability Lack of risk pricing mechanisms Absence of loan review mechanism Ineffective system of monitoring of accounts While the creditor can influence and control the internal factors to improve quality of the credit portfolio, the risk due to external factors can be minimised by proper diversification across industries and by initiating necessary changes in the loan portfolio in anticipation of adverse developments. Development of effective risk assessment and monitoring systems helps in improving the quality of credit decisions thereby reducing loan losses on an on-going basis and gradually improving the quality of the loan portfolio. The main advantages of a credit risk-rating model are: The rating primarily assists in the taking of credit decisions, besides creating a database of borrowal accounts. The database, so created, facilitates formulation of policies related to loan approvals, necessity and extent of risk mitigants like collaterals, pricing, monitoring frequency, etc. In particular. Credit risk rating is useful in deciding the following matters: Whether to lend to a borrower or not: The credit risk rating of a borrower "determines the appetite of the creditor and helps in determining exposure level. A creditor would be willing to lend to highly rated borrowers but would not like exposure to borrowers with very poor credit risk rating. 2. Pricing: The risk premium to be charged to a borrower is best linked to the credit risk rating so that borrowers with poor credit rating are priced high. Credit rating, however, is just one amongs several inputs to pricing. 3. Risk Mitigants: The extent of collateral security required and the need to step up margin requirements are linked to credit risk rating of a borrower. The higher the risk category of a borrower, the greater should be the value of collateral and/or margins. 4. Level of decision-making: Credit risk rating helps in determining the delegation of loan sanction/approval powers. For low risk borrowers, the power of approval can be at the branch level to facilitate faster sanctioning of credits thereby ensuring better customer service. For higher risk borrowers, approval from higher levels may be required. 5. Frequency of renewal and monitoring: Renewal of facility in case of high rated borrowers can be considered at longer intervals as compared to low rated borrowers. Further, high-risk borrowers could be monitored on a more frequent basis than the low risk ones. Credit risk rating is an important input for making credit decisions, besides other factors like collateral provided, period and quality of relationship with the borrower, portfolio concentration etc. Credit risk ratings eventually help a creditor to assign a probability of default for a.borrower according to risk category This probability of default is determined statistically from past data by observing the behaviour of various clients over a number of years. The expected losses from a loan can be determined using this probability of default. This quantitative definition of credit risk helps in taking quality credit decision and its linkage to terms and conditions, amount, interest rate, maturity etc. A database of successive risk ratings, assists in the creating a default probability matrix. The accumulation of data based on individual credit risk rating helps in putting in place scentific pricing mechanism. The aggregation of credit risk in a creditor's portfolio helps in assessing the capital adequacy of the creditor to take appropriate action and in managing For banking institutions in particular, the Basel Committee on Banking Supervision issued a Consultative Paper on New Capital Adequacy framework in June 99 which was intended to replace the 1998 Accord on international convergence of capital measures and capital standards. The Committee also brought out guidelines for implementing the new framework. This accord requires every bank across the world will be required to introduce international credit risk ratin mechanisms to assess the distribution of various risk rating categories in its credit portfolio. The resultant aggregation of credit risk rating would be linked to Capital Adequacy requirements of such institutions. The has defined a time frame of three years for implementing the new Accord. The new Accord interalia stipulates two approaches, namely. Standardised and Internal Ratina Based Approach. Under both the approaches, the emphasis is laid on risk rating of exposures eitherthrough an external credit rating agency or through an internal mechanism. Credit rating for loans of commercial banks is a new concept in India. So far only a few banks have been conducting credit risk rating exercise and there is no established model to carry out credit risk rating for commercial loans in Indian conditions. US.patent 6,078.903 describes a method for assessing credit risk which requires estimation of olatility in market value of the borrower's assets to arrive at a projected risk of defaulting on payment of the credit amount. This model makes use of the market value of borrowers assets as reflected by its share price to assess the worth of the borrower's assets accurately - a situation that is not necessarily true in all markets. This model is therefore not applicable to Further, this model is not useable for those borrowers for whom market data is not available. The object and summary of the invention The object of this invention is to overcome the above disadvantages and provide a method, computing system and program product for evaluating credit risk rating independently of market valuations. To achieve the said objective, this invention provides a computing system for assessing credit risk rating comprising a central processing unit, associated memory and input / output devices, a mechanism for assessing the credit risk rating of client with an existing operation, said mechanism consisting of: a first program means, located in said memory for subjective appraisal of the reliability of past financials, effect of future risk factors, performance analysing trends in terms of direction, magnitude and variability, a second program means located in said memory for incorporating the impact of future prospects of the industry segments in which said client operates, a third program means located in said memory for appraising management capability, and a fourth program means located in said memory for measuring account performance using quantified defined adverse performance indicators, the combination of the output from said first, second, third and fourth program means resulting in a quantified assessment of credit risk rating The said mechanism for subjective appraisal of past financials provides a mechanism for using pre-defined criteria and rating determination factors to neutralise the impact of non disclosures / unreliable disclosures. The said program means to incorporate future risk factors provides a mechanism for quantification of the capacity to withstand defined future risks. The said mechanism for trend evaluation is used to assess the future risk by discounting said past financials. The said program means for evaluating position provides a mechanism for assessing market position factors and program means for comparing operating efficiency with peers. The said program means for appraising management capability uses objective and subjective assessment evaluates achievement against sales target, profit after tax, track record in execution of targets, track record in debt payment, integrity commitment and sincerity of the management and financial strength and group support of management. The said mechanism for measurement of performance of account is based on a Performance Monitoring System Rank (PMS Rank as herein described) that evaluates performance against several parameters classified under different categories on both financial and non-financial areas of operation over a defined period. The said rating determination factors comprise the level of transparency in accounting, quality of inventory, readability of debtors and quality of investment / advances to others. The said future risk factors provides impact of contingent liability, foreign exchange risk, impact of merger / demerger / expansion, cash flow adequacy and impact of diversion of funds. The said program means for analysing trends covers financial parameters of net sales, prqfit\| before tax, operating cash flow as a percentage of total debt and total current assets as a percentage of short term borrowings. The said performance index is the aggregation of the maximum score against each said category. The said program means for analysing financials provides a mechanism for assessing objective factors of gross sales growth rate, operating. profit before depreciation, interest and tax, as percentage of sales, short t erm borrowings as percentage of net sales, operating cash flow as percentage of total debt and net operating cash flow as percentage of total debt. The said program means for evaluating market position factors provides mechanism for determining competitive position, input related risk, production related risk, product related risk, price competitiveness and market related risks. The said operating efficiency evaluation program means provides operating leverage, inventory turnover, credit period allowed and credit period availed, and ratio of net sales to current assets, as herein defined. The present invention also provides a computer program product for use in the instnat computing system comprising computer readable program code stored one omputer readable storage medium embodied therein for assessing credit risk rating of a client with an existing operations of at least one year, comprising: computer readable program code means configured for subjective appraisal of the reliability of past financials, effect of future risk factors, performance analysing trends in terms of direction, magnitude and variability, computer readable program code means configured for incorporating the impact of future prospects of the industry segments in which said client operates, computer readable program code means configured for appraising management capability, and computer readable program code means configured for measuring account performance using quantified defined adverse performance indicators, the combination of the output from said first, second, third and fourth program means resulting in a quantified assessment of credit risk rating The said computer readable program code means configured for subjective appraisal of past financials provides a mechanism for using pre-defined criteria and rating determination factors to neutralise the impact of non disclosures / unreliable disclosures. The said computer readable program code means configured for incorporating future risk factors provides a mechanism for quantification of the capacity to withstand defined future risks. The said computer readable program code means configured for trend evaluation is used to asses the future risk by discounting said past financials. The said computer readable program code means configured for evaluating business position provides a m echanism for assessing m arket position factors and means for comparing operating efficiency with peers. The said computer readable program code means configured for appraising management capability uses objective and subjective assessment evaluating achievement against sales target, profit after tax, track record in execution of targets, track record in debt payment, integrity commitment and sincerity of the management and financial strength and group support of management. The said computer readable program code means configured for measurement of, performance of account is based on a PMS index generated by evaluation of performance against several parameters classified under different categories on both financial and non-financial areas of operation over a defined period. The said rating determination factors provides transparency in accounting, quality of inventory, realisability of debtors and quality of investment / advances to others. The said future risk factors provides impact of contingent liability, foreign exchange risk, impact of merger 7 demerger / expansion, cash flow adequacy and impact of diversion of funds. The said computer readable program code means configured for analysing trends covers financial parameters of net sales, profit before tax, operating cash flow a s a percentage of total debt and total current assets as a percentage of short term borrowings. The said PMS index is the aggregation of the maximum score against each said category. The said computer readable program code means configured for analysing financials provides a mechanism for assessing objective factors of gross sales growth rate, operating profit before depreciation, interest and tax, as percentage of sales, short term borrowings as percentage of net sales, operating cash flow as percentage of total debt and net operating cash flow as percentage of total debt. The said computer readable program code means configured for evaluating market position factors provides mechanism for determining competitive position, input related risk, production related risk, product related risk, price competitiveness and market related risks. The said operating efficiency evaluation computer readable program code means provides operating leverage, inventory turnover, credit period allowed and credit period availed, and ratio of net sales to current assets, as herein defined. BRIEF DESCRIPTION OF THE FIGURES The invention will now be described with reference to the accompanying drawings. Fig. 1 shows a credit rating computing system according to this invention. Fig. 2 shows the data source for the operation of this invention. Fig. 3 shows a flow chart of the operation of the invention Fig. 4 shows a flow chart of the operation of the analysis of financial performance Fig. 5 shows a flow chart of the operation of the analysis of business position Fig. 6 shows a flow chart of the operation of the management performance Fig. 7 shows a flow chart of the Preventive Monitoring System for measurement of the conduct of account. As shown in figure 1, a computing system for credit risk rating assessment using this invention incorporates a central processing unit (1.1), Display unit (1.2), Secondary Storage (1.3), System Bus (1.4) and Memory (1.5) containing Financial Analysis Means (1.6), Business Position Analysis Means (1.7), Management Performance Analysis Means (1.8), and Preventive Monitoring System (1.9). Also a company-wise audited financials database (1.10) provides the data used by the system for measuring the credit risk rating of clients. Figure 2 shows the data sources for each of the operations. Financial performance analysis (2.3). Business Position analysis (2.4) and Management Performance analysis (2.5). utilize the audited financials of the client obtained from the company-wise audited financials database (2.1) as well as subjective data (2.7. 2.8 and 2.9 respectively) supplied by the individual conducting the credit rating assessment. The conduct of account analysis (2.6) however is on the basis of the Preventive Monitoring System database (2.2) relating to the conduct of the account for each client. In addition, subjective data (2.10) is provided by the credit risk rating assessor. The movement of the PMS Index influences the credit risk rating of the client. The top level flow chart of the operation of the Credit Risk Rating System is shown in Figure 3. The credit risk rating assessor initially identifies a peer group considering all the industry segments in which the client operates (3.1). The system then extracts the peer group data (3.2) from the company-wise audited financials database and generates peer group performance measurement parameter values (3.3). A financial performance analysis is then conducted (3.4) against peer group relative parameters as well as absolute benchmark parameters using the client's audited financials data obtained from the company-wise audited financials database duly adjusted for future risk, trend evaluation & subjective assessment of financials. This analysis yields a score-A value. The business position of the client is then evaluated (3.5) against some peer group relative parameters to provide a business position score, which is adjusted for industry prospects to get Score - B. the Management performance is assessed (3.6) against defined performance parameters to generate score-C. The conduct of the client account is quantitatively measured (3.7) using the Preventive Monitoring System against defined parameters using the data obtained from the operations of the clients' account, to evaluate score-D. Finally, the 4 scores (Score-A. Score-B. score-C and score-D) are aggregated to generate the final rating (3.8). Figure 4 shows a flow chart defining the operation of the financial analysis system. A peer group comparison is conducted (4.1) with the selected peer group using the identified financial ratios listed below. Parameter Gross Sales Growth Rate (%) OPBDIT / Sales (%) Short term Bank Borrowings / Net Sales (%) Operating Cash Flow / Total Debt (%) Net Operating Cash Flow /Total Debt (%) The Gross Sales growth rate of the company -is based on compounded annual growth rate ever the past three years. An absolute comparison of financial performance is conducted (4.2) on 6 key financial ratios against specified benchmark values as shown below: (Table Removed) A Subjective Assessment of the clients financials is carried out (4.3). The purpose of subjective assessment of financials is to make an analysis of the reliability of financials furnished in the audited balance sheet. The analysis is done on the following four parameters. (Table Removed) transparency in Accounting is assessed with relevance to the clients" maintenance of accounts, accounting principles, auditor's qualifying remarks and such other factors, which are quantified and the impact thereof on the company's net worth is evaluated. The Quality of inventory and Readability of debtors data, assesses the extent of realisable value of inventory & debtors in comparison to the book value. The purpose of such evaluation is to assess the likelihood of deterioration in clients' financials. if any. The Quality of Investment is assessed on the following three parameters in sequential order 1 Quantum of Investment in comparison to the Net Worth 2 Market value of such investments in comparison to book value, erosion if any and its impact on net worth 3 Return on such investment in comparison to market return. The aggregate score obtained is used to discount the previous scores using a discounting matrix as shown below: (Table Removed) The trends of the following 4 parameters are evaluated (4.4) to assess the client's performance in the last three years. TREND ADJUSTMENT (Table Removed) The above parameters are evaluated in terms of direction, magnitude and variability. The following factors are evaluated to assess the future risk aspects (4.5) of the client's financials. Future Risk: Parameter Impact of Contingent Liability Foreign Exchange Risk Impact of merger/demerger/expansion on key financials Cash flow adequacy Impact of diversion on future financials Impact of Contingent Liability is assessed with reference to the aggregate contingent liability & the likely devolvement of such liability. The quantification of such contingent liabilities are compared to the clients' net worth to determine possible impact. The Foreign Exchange Risk, is assessed from the aspect of transaction risk and the portfolio risk and is further quantified and analysed with respect to unhedged exposure and its possible impact on net worth. The Impact of merger / demerger is evaluated on the basis of three key financial ratios: • Current Ratio • Debt/Equity ratio • ROCE The assessment is in terms of the likely ratios that may emerge at the end of the rating period compared with absolute benchmark values. On Diversion of Funds, the purpose is only to identify the reason for such diversion, as the quantum of diversion is already evaluated in the absolute comparison parameters. The purpose of the diversion of fund impacts the future risk. The aggregate weighted score of parameters under peer group assessment and absolute assessment is discounted by the subjective assessment and then further discounted by the trend assessment scores. The score so obtained is aggregated with the score under future risk assessment to arrive at score A on weighted average. BUSINESS The Business Position Assessment is conducted in terms of the Operating Efficiency and Market Position. Operating Efficiency is evaluated with respect to the peer group (5.1) based on 11 parameters of which the assessor selects the most relevant 5 parameters applicable to the industry in which the client operates. The data for comparison is derived from the peer group data. (Table Removed) * Only five out of eleven parameters are to be selected, while operating leverage is compulsory, any four other parameters are to be chosen. All parameters carry equal weight. The Market position of the client is assessed (5.2) on the basis of important / relevant parameters out of the 7 listed below. Each main parameter is derived from sub parameters that are rated individually with the assessor exercising the discretion of selecting the most appropriate sub parameters. The evaluation of each sub-parameter is done from the perspective of the client's position vis-a-vis the peer/industry in which the client operates. The average value / score of all the sub parameters determines the score for the main parameter. (Table Removed) Assessor is required to select most important parameters/ factors applicable to the industry segment being evaluated. All the parameters/ factors within the parameters carry equal weight. Assessor can select any number of factors and can add up to two additional factors under each parameter. The weighted average of the two scores shown above are adjusted for industry score, as per matrix below to determine score-B. (Table Removed) The evaluation of Management Performance is based on both objective and subjective analysis. The objective evaluation is performed (6.1) to determine the capability of management to achieve the budgeted sales & profits. The subjective evaluation (6.2) assesses the willingness of the management and its capability to run the company on the basis of 7 parameters: (Table Removed) The weighted average of all the parameters determines score-C (6.3) Figure 7 shows the Preventive Monitroring System (PMS) for measuring the Conduct of Account. The PMS scrutinizes the clients conduct of account database for the previous one year period to identify negative factors under 10 categories. Each category includes several parameters that are individually measured based on available data. The score against each parameter is aggregated for the past one year period (7.11). the parameter with the maximum aggregate score is selected from each category (7.12) and its score is used to represent the category (7.13). The scores of all the categories are totalled (7.14) to arrive at the PMS Index Score (7.15). which corresponds to a PMS Rank (7.16). The PMS Rank is finally converted to a PMS rating score (7.17). Score under A to D will be aggregated on the weighted average basis as under: Parameter Parameter weight Financial strength 40 % Business & industry 30 % Management 20 % Conduct of account 10% The system described above is referred to as PNBTRAC (Punjab National Bank Techniques For Risk Assessment of Credit). A. STATUS OF DOCUMENTATION/ SECURITY CREATION/ TERMS OF SECTION (Table Removed) B. STATUS OF FINANCIAL DISCIPLINE (Table Removed) C. OPERATIONAL & FINANCIAL PERFORMANCE INDICATORS (Table Removed) D. STATUS/QUALITY OF BILLS REALISATION (Table Removed) E. STATUS OF FEED BACK BY THE BORROWER (Table Removed) E. LEVEL OF CURRENT ASSETS & CURRENT LIABILITIES (Table Removed) G, STATUS OF SECURITY VALUE (Table Removed) H. IRREGULARITY IN THE ACCOUNT WITH US (Table Removed) I. IRREGULARITIES WITH OTHER BANKS/FIs, ETC. (Table Removed) .3. OTHER IMPORTANT DEVELOPMENTS (Table Removed)

Full Text

Field of the invention
This invention relates to a computing system and program product for assessing credit risk rating of a borrower.
Background of the invention
Credit risk rating provides for assessing the risk of a borrower failing to meet obligations towards the creditor in accordance with agreed terms and conditions. It is the risk of default on the part of borrower, which could be due to either inability and/or unwillingness to repay debts. Credit risk is associated with individual borrowers. Minimisation of credit risk requires a system to assess and manage the risk associated with individual borrowers. In addition, the terms and conditions of loans and advances sanctioned to a borrower (i.e. the price, the maturity, the form of credit etc.) determine the profit earned by the creditor. If the terms are decided without proper assessment of the credit risk, the creditor incurs losses by charging low interest rates from poor quality customers that default on repayments or charging high rates from good quality customers thereby loosing profitable business to competitors. In the emerging competitive environment a sound credit risk rating system can be a source of competitive advantage for the creditor. The inputs from the credit rating system can also be used for portfolio analysis.
Credit risk depends on both external and internal factors. The external factors can be economy wide as well as company specific.
Some of the economy wide factors are.
 State of the economy
 Wide swings in commodity prices
 Fluctuations in foreign exchange rates and interest rates
 Trade restrictions
 Economic sanctions
 Government policies, etc.

Some company specific factors are: Management expertise Company policies Labour relations
['he internal factors within the creditor set up. influencing credit risk are: Deficiencies in loan policies/administration Absence-of' prudential credit concentration limits
Inadequately defined lending limits for Loan Officers/Credit Committees Deficiencies in appraisal of borrowers' financial position
Excessive dependence on collateral without ascertaining its quality/realisability Lack of risk pricing mechanisms Absence of loan review mechanism Ineffective system of monitoring of accounts
While the creditor can influence and control the internal factors to improve quality of the credit portfolio, the risk due to external factors can be minimised by proper diversification across industries and by initiating necessary changes in the loan portfolio in anticipation of adverse developments. Development of effective risk assessment and monitoring systems helps in improving the quality of credit decisions thereby reducing loan losses on an on-going basis and gradually improving the quality of the loan portfolio.
The main advantages of a credit risk-rating model are: The rating primarily assists in the taking of credit decisions, besides creating a database of borrowal accounts. The database, so created, facilitates formulation of policies related to loan approvals, necessity and extent of risk mitigants like collaterals, pricing, monitoring frequency, etc.

In particular. Credit risk rating is useful in deciding the following matters:
Whether to lend to a borrower or not: The credit risk rating of a borrower "determines the appetite of the creditor and helps in determining exposure level. A creditor would be willing to lend to highly rated borrowers but would not like exposure to borrowers with very poor credit risk rating.
2. Pricing: The risk premium to be charged to a borrower is best linked to the credit risk
rating so that borrowers with poor credit rating are priced high. Credit rating,
however, is just one amongs several inputs to pricing.
3. Risk Mitigants: The extent of collateral security required and the need to step up
margin requirements are linked to credit risk rating of a borrower. The higher the risk
category of a borrower, the greater should be the value of collateral and/or margins.
4. Level of decision-making: Credit risk rating helps in determining the delegation of
loan sanction/approval powers. For low risk borrowers, the power of approval can be
at the branch level to facilitate faster sanctioning of credits thereby ensuring better
customer service. For higher risk borrowers, approval from higher levels may be
required.
5. Frequency of renewal and monitoring: Renewal of facility in case of high rated
borrowers can be considered at longer intervals as compared to low rated borrowers.
Further, high-risk borrowers could be monitored on a more frequent basis than the
low risk ones.
Credit risk rating is an important input for making credit decisions, besides other factors like collateral provided, period and quality of relationship with the borrower, portfolio concentration etc.
Credit risk ratings eventually help a creditor to assign a probability of default for a.borrower according to risk category This probability of default is determined statistically from past data by observing the behaviour of various clients over a number of years. The expected losses from a loan can be determined using this probability of default. This quantitative definition of credit risk helps in taking quality credit decision and its linkage to terms and conditions, amount, interest rate, maturity etc. A database of successive risk ratings, assists in the creating a default probability matrix.

The accumulation of data based on individual credit risk rating helps in putting in place scentific pricing mechanism.
The aggregation of credit risk in a creditor's portfolio helps in assessing the capital adequacy of the creditor to take appropriate action and in managing
For banking institutions in particular, the Basel Committee on Banking Supervision issued a
Consultative Paper on New Capital Adequacy framework in June 99 which was intended to
replace the 1998 Accord on international convergence of capital measures and capital
standards. The Committee also brought out guidelines for implementing the new framework.
This accord requires every bank across the world will be required to introduce international
credit risk ratin mechanisms to assess the distribution of various risk rating categories in its
credit portfolio. The resultant aggregation of credit risk rating would be linked to Capital
Adequacy requirements of such institutions. The has defined a time frame
of three years for implementing the new Accord.
The new Accord interalia stipulates two approaches, namely. Standardised and Internal
Ratina Based Approach. Under both the approaches, the emphasis is laid on risk rating of
exposures eitherthrough an external credit rating agency or through an internal mechanism.
Credit rating for loans of commercial banks is a new concept in India. So far only a few banks have been conducting credit risk rating exercise and there is no established model to carry out credit risk rating for commercial loans in Indian conditions.
US.patent 6,078.903 describes a method for assessing credit risk which requires estimation of

olatility in market value of the borrower's assets to arrive at a projected risk of defaulting on payment of the credit amount. This model makes use of the market value of borrowers assets as reflected by its share price to assess the worth of the borrower's assets accurately - a situation that is not necessarily true in all markets. This model is therefore not applicable to Further, this model is not useable for those borrowers for whom market data is not available.

The object and summary of the invention
The object of this invention is to overcome the above disadvantages and provide a method, computing system and program product for evaluating credit risk rating independently of market valuations.
To achieve the said objective, this invention provides a computing system for assessing credit risk rating comprising a central processing unit, associated memory and input / output devices, a mechanism for assessing the credit risk rating of client with an existing operation, said mechanism consisting of:
a first program means, located in said memory for subjective appraisal of the reliability of past financials, effect of future risk factors, performance analysing trends in terms of direction, magnitude and variability,
a second program means located in said memory for incorporating the impact of future prospects of the industry segments in which said client operates,
a third program means located in said memory for appraising management capability, and
a fourth program means located in said memory for measuring account performance using quantified defined adverse performance indicators,
the combination of the output from said first, second, third and fourth program means resulting in a quantified assessment of credit risk rating

The said mechanism for subjective appraisal of past financials provides a mechanism for using pre-defined criteria and rating determination factors to neutralise the impact
of non disclosures / unreliable disclosures.

The said program means to incorporate future risk factors provides a mechanism for quantification of the capacity to withstand defined future risks.
The said mechanism for trend evaluation is used to assess the future risk by discounting said past financials.
The said program means for evaluating position provides a mechanism for assessing market position factors and program means for comparing operating efficiency with peers.
The said program means for appraising management capability uses objective and subjective assessment evaluates achievement against sales target, profit after tax, track record in execution of targets, track record in debt payment, integrity commitment and sincerity of the management and financial strength and group support of management.
The said mechanism for measurement of performance of account is based on a Performance Monitoring System Rank (PMS Rank as herein described) that evaluates performance against several parameters classified under different categories on both financial and non-financial areas of operation over a defined period.
The said rating determination factors comprise the level of transparency in accounting, quality of inventory, readability of debtors and quality of investment / advances to others.
The said future risk factors provides impact of contingent liability, foreign exchange risk, impact of merger / demerger / expansion, cash flow adequacy and impact of diversion of funds.

The said program means for analysing trends covers financial parameters of net sales, prqfit| before tax, operating cash flow as a percentage of total debt and total current assets as a percentage of short term borrowings.
The said performance index is the aggregation of the maximum score against each said category.
The said program means for analysing financials provides a mechanism for assessing objective factors of gross sales growth rate, operating. profit before depreciation, interest and tax, as percentage of sales, short t erm borrowings as percentage of net sales, operating cash flow as percentage of total debt and net operating cash flow as percentage of total debt.
The said program means for evaluating market position factors provides mechanism for determining competitive position, input related risk, production related risk, product related risk, price competitiveness and market related risks.
The said operating efficiency evaluation program means provides operating leverage, inventory turnover, credit period allowed and credit period availed, and ratio of net sales to current assets, as herein defined.
The present invention also provides a computer program product for use in the instnat computing system comprising computer readable program code stored one omputer readable storage medium embodied therein for assessing credit risk rating of a client with an existing operations of at least one year, comprising:
computer readable program code means configured for subjective appraisal of the reliability of past financials, effect of future risk factors, performance analysing trends in terms of direction, magnitude and variability,

computer readable program code means configured for incorporating the impact of future prospects of the industry segments in which said client operates,
computer readable program code means configured for appraising management capability, and
computer readable program code means configured for measuring account performance using quantified defined adverse performance indicators,
the combination of the output from said first, second, third and fourth program means resulting in a quantified assessment of credit risk rating
The said computer readable program code means configured for subjective appraisal of past financials provides a mechanism for using pre-defined criteria and rating determination factors to neutralise the impact of non disclosures / unreliable disclosures.
The said computer readable program code means configured for incorporating future risk factors provides a mechanism for quantification of the capacity to withstand defined future risks.
The said computer readable program code means configured for trend evaluation is used to asses the future risk by discounting said past financials.
The said computer readable program code means configured for evaluating business position provides a m echanism for assessing m arket position factors and means for comparing operating efficiency with peers.

The said computer readable program code means configured for appraising management capability uses objective and subjective assessment evaluating achievement against sales target, profit after tax, track record in execution of targets, track record in debt payment, integrity commitment and sincerity of the management and financial strength and group support of management.
The said computer readable program code means configured for measurement of, performance of account is based on a PMS index generated by evaluation of performance against several parameters classified under different categories on both financial and non-financial areas of operation over a defined period.
The said rating determination factors provides transparency in accounting, quality of inventory, realisability of debtors and quality of investment / advances to others.
The said future risk factors provides impact of contingent liability, foreign exchange risk, impact of merger 7 demerger / expansion, cash flow adequacy and impact of diversion of funds.
The said computer readable program code means configured for analysing trends covers financial parameters of net sales, profit before tax, operating cash flow a s a percentage of total debt and total current assets as a percentage of short term borrowings.
The said PMS index is the aggregation of the maximum score against each said category.
The said computer readable program code means configured for analysing financials provides a mechanism for assessing objective factors of gross sales growth rate, operating profit before depreciation, interest and tax, as percentage of sales, short term borrowings as percentage of net sales, operating cash flow as percentage of total debt and net operating cash flow as percentage of total debt.

The said computer readable program code means configured for evaluating market position factors provides mechanism for determining competitive position, input related risk, production related risk, product related risk, price competitiveness and market related risks.
The said operating efficiency evaluation computer readable program code means provides operating leverage, inventory turnover, credit period allowed and credit period availed, and ratio of net sales to current assets, as herein defined.
BRIEF DESCRIPTION OF THE FIGURES
The invention will now be described with reference to the accompanying drawings.
Fig. 1 shows a credit rating computing system according to this invention.
Fig. 2 shows the data source for the operation of this invention.
Fig. 3 shows a flow chart of the operation of the invention
Fig. 4 shows a flow chart of the operation of the analysis of financial performance
Fig. 5 shows a flow chart of the operation of the analysis of business position
Fig. 6 shows a flow chart of the operation of the management performance
Fig. 7 shows a flow chart of the Preventive Monitoring System for measurement of

the conduct of account.
As shown in figure 1, a computing system for credit risk rating assessment using this invention incorporates a central processing unit (1.1), Display unit (1.2), Secondary Storage (1.3), System Bus (1.4) and Memory (1.5) containing Financial Analysis Means (1.6), Business Position Analysis Means (1.7), Management Performance Analysis Means (1.8), and Preventive Monitoring System (1.9). Also a company-wise audited financials database (1.10) provides the data used by the system for measuring the credit risk rating of clients.

Figure 2 shows the data sources for each of the operations. Financial performance analysis (2.3). Business Position analysis (2.4) and Management Performance analysis (2.5). utilize the audited financials of the client obtained from the company-wise audited financials database (2.1) as well as subjective data (2.7. 2.8 and 2.9 respectively) supplied by the individual conducting the credit rating assessment. The conduct of account analysis (2.6) however is on the basis of the Preventive Monitoring System database (2.2) relating to the conduct of the account for each client. In addition, subjective data (2.10) is provided by the credit risk rating assessor. The movement of the PMS Index influences the credit risk rating of the client.
The top level flow chart of the operation of the Credit Risk Rating System is shown in Figure 3. The credit risk rating assessor initially identifies a peer group considering all the industry segments in which the client operates (3.1). The system then extracts the peer group data (3.2) from the company-wise audited financials database and generates peer group performance measurement parameter values (3.3). A financial performance analysis is then conducted (3.4) against peer group relative parameters as well as absolute benchmark parameters using the client's audited financials data obtained from the company-wise audited financials database duly adjusted for future risk, trend evaluation & subjective assessment of financials. This analysis yields a score-A value. The business position of the client is then evaluated (3.5) against some peer group relative parameters to provide a business position score, which is adjusted for industry prospects to get Score - B. the Management performance is assessed (3.6) against defined performance parameters to generate score-C. The conduct of the client account is quantitatively measured (3.7) using the Preventive Monitoring System against defined parameters using the data obtained from the operations of the clients' account, to evaluate score-D. Finally, the 4 scores (Score-A. Score-B. score-C and score-D) are aggregated to generate the final rating (3.8).
Figure 4 shows a flow chart defining the operation of the financial analysis system. A peer group comparison is conducted (4.1) with the selected peer group using the identified financial ratios listed below.

Parameter
Gross Sales Growth Rate (%)
OPBDIT / Sales (%)
Short term Bank Borrowings / Net Sales (%)
Operating Cash Flow / Total Debt (%)
Net Operating Cash Flow /Total Debt (%)
The Gross Sales growth rate of the company -is based on compounded annual growth rate ever the past three years.
An absolute comparison of financial performance is conducted (4.2) on 6 key financial ratios
against specified benchmark values as shown below:

(Table Removed)
A Subjective Assessment of the clients financials is carried out (4.3). The purpose of subjective assessment of financials is to make an analysis of the reliability of financials furnished in the audited balance sheet. The analysis is done on the following four parameters.
(Table Removed)

transparency in Accounting is assessed with relevance to the clients" maintenance of accounts, accounting principles, auditor's qualifying remarks and such other factors, which are quantified and the impact thereof on the company's net worth is evaluated.
The Quality of inventory and Readability of debtors data, assesses the extent of realisable value of inventory & debtors in comparison to the book value. The purpose of such evaluation is to assess the likelihood of deterioration in clients' financials. if any.
The Quality of Investment is assessed on the following three parameters in sequential order
1 Quantum of Investment in comparison to the Net Worth
2 Market value of such investments in comparison to book value, erosion if any and its
impact on net worth
3 Return on such investment in comparison to market return.
The aggregate score obtained is used to discount the previous scores using a discounting matrix as shown below:
(Table Removed)

The trends of the following 4 parameters are evaluated (4.4) to assess the client's performance in the last three years.
TREND ADJUSTMENT
(Table Removed)

The above parameters are evaluated in terms of direction, magnitude and variability.
The following factors are evaluated to assess the future risk aspects (4.5) of the client's financials.

Future Risk: Parameter
Impact of Contingent Liability
Foreign Exchange Risk
Impact of merger/demerger/expansion on key financials
Cash flow adequacy
Impact of diversion on future financials
Impact of Contingent Liability is assessed with reference to the aggregate contingent liability & the likely devolvement of such liability. The quantification of such contingent liabilities are compared to the clients' net worth to determine possible impact.
The Foreign Exchange Risk, is assessed from the aspect of transaction risk and the portfolio risk and is further quantified and analysed with respect to unhedged exposure and its possible impact on net worth.
The Impact of merger / demerger is evaluated on the basis of three key financial ratios:
• Current Ratio
• Debt/Equity ratio
• ROCE
The assessment is in terms of the likely ratios that may emerge at the end of the rating period compared with absolute benchmark values.
On Diversion of Funds, the purpose is only to identify the reason for such diversion, as the quantum of diversion is already evaluated in the absolute comparison parameters. The purpose of the diversion of fund impacts the future risk.
The aggregate weighted score of parameters under peer group assessment and absolute assessment is discounted by the subjective assessment and then further discounted by the trend assessment scores. The score so obtained is aggregated with the score under future risk assessment to arrive at score A on weighted average.

BUSINESS
The Business Position Assessment is conducted in terms of the Operating Efficiency and Market Position. Operating Efficiency is evaluated with respect to the peer group (5.1) based on 11 parameters of which the assessor selects the most relevant 5 parameters applicable to the industry in which the client operates. The data for comparison is derived from the peer group data.
(Table Removed)
* Only five out of eleven parameters are to be selected, while operating leverage is compulsory, any four other parameters are to be chosen. All parameters carry equal weight.
The Market position of the client is assessed (5.2) on the basis of important / relevant parameters out of the 7 listed below. Each main parameter is derived from sub parameters that are rated individually with the assessor exercising the discretion of selecting the most appropriate sub parameters. The evaluation of each sub-parameter is done from the perspective of the client's position vis-a-vis the peer/industry in which the client operates. The average value / score of all the sub parameters determines the score for the main parameter.
(Table Removed)

Assessor is required to select most important parameters/ factors applicable to the industry segment being evaluated. All the parameters/ factors within the parameters carry equal weight. Assessor can select any number of factors and can add up to two additional factors under each parameter.
The weighted average of the two scores shown above are adjusted for industry score, as per matrix below to determine score-B.
(Table Removed)

The evaluation of Management Performance is based on both objective and subjective analysis.
The objective evaluation is performed (6.1) to determine the capability of management to achieve the budgeted sales & profits. The subjective evaluation (6.2) assesses the willingness of the management and its capability to run the company on the basis of 7 parameters:
(Table Removed)
The weighted average of all the parameters determines score-C (6.3)
Figure 7 shows the Preventive Monitroring System (PMS) for measuring the Conduct of Account. The PMS scrutinizes the clients conduct of account database for the previous one year period to identify negative factors under 10 categories.
Each category includes several parameters that are individually measured based on available data. The score against each parameter is aggregated for the past one year period (7.11). the parameter with the maximum aggregate score is selected from each category (7.12) and its score is used to represent the category (7.13). The scores of all the categories are totalled (7.14) to arrive at the PMS Index Score (7.15). which corresponds to a PMS Rank (7.16). The PMS Rank is finally converted to a PMS rating score (7.17).
Score under A to D will be aggregated on the weighted average basis as under:
Parameter
Parameter weight
Financial strength 40 %
Business & industry 30 %
Management 20 %
Conduct of account 10%
The system described above is referred to as PNBTRAC (Punjab National Bank Techniques For Risk Assessment of Credit).

A. STATUS OF DOCUMENTATION/ SECURITY CREATION/ TERMS OF
SECTION
(Table Removed)
B. STATUS OF FINANCIAL DISCIPLINE
(Table Removed)
C. OPERATIONAL & FINANCIAL PERFORMANCE INDICATORS
(Table Removed)

D. STATUS/QUALITY OF BILLS REALISATION
(Table Removed)
E. STATUS OF FEED BACK BY THE BORROWER
(Table Removed)
E. LEVEL OF CURRENT ASSETS & CURRENT LIABILITIES
(Table Removed)
G, STATUS OF SECURITY VALUE
(Table Removed)
H. IRREGULARITY IN THE ACCOUNT WITH US
(Table Removed)
I. IRREGULARITIES WITH OTHER BANKS/FIs, ETC.
(Table Removed)
.3. OTHER IMPORTANT DEVELOPMENTS
(Table Removed)

Field of the invention
This invention relates to a computing system and program product for assessing credit risk rating of a borrower.
Background of the invention
Credit risk rating provides for assessing the risk of a borrower failing to meet obligations towards the creditor in accordance with agreed terms and conditions. It is the risk of default on the part of borrower, which could be due to either inability and/or unwillingness to repay debts. Credit risk is associated with individual borrowers. Minimisation of credit risk requires a system to assess and manage the risk associated with individual borrowers. In addition, the terms and conditions of loans and advances sanctioned to a borrower (i.e. the price, the maturity, the form of credit etc.) determine the profit earned by the creditor. If the terms are decided without proper assessment of the credit risk, the creditor incurs losses by charging low interest rates from poor quality customers that default on repayments or charging high rates from good quality customers thereby loosing profitable business to competitors. In the emerging competitive environment a sound credit risk rating system can be a source of competitive advantage for the creditor. The inputs from the credit rating system can also be used for portfolio analysis.
Credit risk depends on both external and internal factors. The external factors can be economy wide as well as company specific.
Some of the economy wide factors are.
 State of the economy
 Wide swings in commodity prices
 Fluctuations in foreign exchange rates and interest rates
 Trade restrictions
 Economic sanctions
 Government policies, etc.

Some company specific factors are: Management expertise Company policies Labour relations
['he internal factors within the creditor set up. influencing credit risk are: Deficiencies in loan policies/administration Absence-of' prudential credit concentration limits
Inadequately defined lending limits for Loan Officers/Credit Committees Deficiencies in appraisal of borrowers' financial position
Excessive dependence on collateral without ascertaining its quality/realisability Lack of risk pricing mechanisms Absence of loan review mechanism Ineffective system of monitoring of accounts
While the creditor can influence and control the internal factors to improve quality of the credit portfolio, the risk due to external factors can be minimised by proper diversification across industries and by initiating necessary changes in the loan portfolio in anticipation of adverse developments. Development of effective risk assessment and monitoring systems helps in improving the quality of credit decisions thereby reducing loan losses on an on-going basis and gradually improving the quality of the loan portfolio.
The main advantages of a credit risk-rating model are: The rating primarily assists in the taking of credit decisions, besides creating a database of borrowal accounts. The database, so created, facilitates formulation of policies related to loan approvals, necessity and extent of risk mitigants like collaterals, pricing, monitoring frequency, etc.

In particular. Credit risk rating is useful in deciding the following matters:
Whether to lend to a borrower or not: The credit risk rating of a borrower "determines the appetite of the creditor and helps in determining exposure level. A creditor would be willing to lend to highly rated borrowers but would not like exposure to borrowers with very poor credit risk rating.
2. Pricing: The risk premium to be charged to a borrower is best linked to the credit risk
rating so that borrowers with poor credit rating are priced high. Credit rating,
however, is just one amongs several inputs to pricing.
3. Risk Mitigants: The extent of collateral security required and the need to step up
margin requirements are linked to credit risk rating of a borrower. The higher the risk
category of a borrower, the greater should be the value of collateral and/or margins.
4. Level of decision-making: Credit risk rating helps in determining the delegation of
loan sanction/approval powers. For low risk borrowers, the power of approval can be
at the branch level to facilitate faster sanctioning of credits thereby ensuring better
customer service. For higher risk borrowers, approval from higher levels may be
required.
5. Frequency of renewal and monitoring: Renewal of facility in case of high rated
borrowers can be considered at longer intervals as compared to low rated borrowers.
Further, high-risk borrowers could be monitored on a more frequent basis than the
low risk ones.
Credit risk rating is an important input for making credit decisions, besides other factors like collateral provided, period and quality of relationship with the borrower, portfolio concentration etc.
Credit risk ratings eventually help a creditor to assign a probability of default for a.borrower according to risk category This probability of default is determined statistically from past data by observing the behaviour of various clients over a number of years. The expected losses from a loan can be determined using this probability of default. This quantitative definition of credit risk helps in taking quality credit decision and its linkage to terms and conditions, amount, interest rate, maturity etc. A database of successive risk ratings, assists in the creating a default probability matrix.

The accumulation of data based on individual credit risk rating helps in putting in place scentific pricing mechanism.
The aggregation of credit risk in a creditor's portfolio helps in assessing the capital adequacy of the creditor to take appropriate action and in managing
For banking institutions in particular, the Basel Committee on Banking Supervision issued a
Consultative Paper on New Capital Adequacy framework in June 99 which was intended to
replace the 1998 Accord on international convergence of capital measures and capital
standards. The Committee also brought out guidelines for implementing the new framework.
This accord requires every bank across the world will be required to introduce international
credit risk ratin mechanisms to assess the distribution of various risk rating categories in its
credit portfolio. The resultant aggregation of credit risk rating would be linked to Capital
Adequacy requirements of such institutions. The has defined a time frame
of three years for implementing the new Accord.
The new Accord interalia stipulates two approaches, namely. Standardised and Internal
Ratina Based Approach. Under both the approaches, the emphasis is laid on risk rating of
exposures eitherthrough an external credit rating agency or through an internal mechanism.
Credit rating for loans of commercial banks is a new concept in India. So far only a few banks have been conducting credit risk rating exercise and there is no established model to carry out credit risk rating for commercial loans in Indian conditions.
US.patent 6,078.903 describes a method for assessing credit risk which requires estimation of

olatility in market value of the borrower's assets to arrive at a projected risk of defaulting on payment of the credit amount. This model makes use of the market value of borrowers assets as reflected by its share price to assess the worth of the borrower's assets accurately - a situation that is not necessarily true in all markets. This model is therefore not applicable to Further, this model is not useable for those borrowers for whom market data is not available.

The object and summary of the invention
The object of this invention is to overcome the above disadvantages and provide a method, computing system and program product for evaluating credit risk rating independently of market valuations.
To achieve the said objective, this invention provides a computing system for assessing credit risk rating comprising a central processing unit, associated memory and input / output devices, a mechanism for assessing the credit risk rating of client with an existing operation, said mechanism consisting of:
a first program means, located in said memory for subjective appraisal of the reliability of past financials, effect of future risk factors, performance analysing trends in terms of direction, magnitude and variability,
a second program means located in said memory for incorporating the impact of future prospects of the industry segments in which said client operates,
a third program means located in said memory for appraising management capability, and
a fourth program means located in said memory for measuring account performance using quantified defined adverse performance indicators,
the combination of the output from said first, second, third and fourth program means resulting in a quantified assessment of credit risk rating

The said mechanism for subjective appraisal of past financials provides a mechanism for using pre-defined criteria and rating determination factors to neutralise the impact
of non disclosures / unreliable disclosures.

The said program means to incorporate future risk factors provides a mechanism for quantification of the capacity to withstand defined future risks.
The said mechanism for trend evaluation is used to assess the future risk by discounting said past financials.
The said program means for evaluating position provides a mechanism for assessing market position factors and program means for comparing operating efficiency with peers.
The said program means for appraising management capability uses objective and subjective assessment evaluates achievement against sales target, profit after tax, track record in execution of targets, track record in debt payment, integrity commitment and sincerity of the management and financial strength and group support of management.
The said mechanism for measurement of performance of account is based on a Performance Monitoring System Rank (PMS Rank as herein described) that evaluates performance against several parameters classified under different categories on both financial and non-financial areas of operation over a defined period.
The said rating determination factors comprise the level of transparency in accounting, quality of inventory, readability of debtors and quality of investment / advances to others.
The said future risk factors provides impact of contingent liability, foreign exchange risk, impact of merger / demerger / expansion, cash flow adequacy and impact of diversion of funds.

The said program means for analysing trends covers financial parameters of net sales, prqfit| before tax, operating cash flow as a percentage of total debt and total current assets as a percentage of short term borrowings.
The said performance index is the aggregation of the maximum score against each said category.
The said program means for analysing financials provides a mechanism for assessing objective factors of gross sales growth rate, operating. profit before depreciation, interest and tax, as percentage of sales, short t erm borrowings as percentage of net sales, operating cash flow as percentage of total debt and net operating cash flow as percentage of total debt.
The said program means for evaluating market position factors provides mechanism for determining competitive position, input related risk, production related risk, product related risk, price competitiveness and market related risks.
The said operating efficiency evaluation program means provides operating leverage, inventory turnover, credit period allowed and credit period availed, and ratio of net sales to current assets, as herein defined.
The present invention also provides a computer program product for use in the instnat computing system comprising computer readable program code stored one omputer readable storage medium embodied therein for assessing credit risk rating of a client with an existing operations of at least one year, comprising:
computer readable program code means configured for subjective appraisal of the reliability of past financials, effect of future risk factors, performance analysing trends in terms of direction, magnitude and variability,

computer readable program code means configured for incorporating the impact of future prospects of the industry segments in which said client operates,
computer readable program code means configured for appraising management capability, and
computer readable program code means configured for measuring account performance using quantified defined adverse performance indicators,
the combination of the output from said first, second, third and fourth program means resulting in a quantified assessment of credit risk rating
The said computer readable program code means configured for subjective appraisal of past financials provides a mechanism for using pre-defined criteria and rating determination factors to neutralise the impact of non disclosures / unreliable disclosures.
The said computer readable program code means configured for incorporating future risk factors provides a mechanism for quantification of the capacity to withstand defined future risks.
The said computer readable program code means configured for trend evaluation is used to asses the future risk by discounting said past financials.
The said computer readable program code means configured for evaluating business position provides a m echanism for assessing m arket position factors and means for comparing operating efficiency with peers.

The said computer readable program code means configured for appraising management capability uses objective and subjective assessment evaluating achievement against sales target, profit after tax, track record in execution of targets, track record in debt payment, integrity commitment and sincerity of the management and financial strength and group support of management.
The said computer readable program code means configured for measurement of, performance of account is based on a PMS index generated by evaluation of performance against several parameters classified under different categories on both financial and non-financial areas of operation over a defined period.
The said rating determination factors provides transparency in accounting, quality of inventory, realisability of debtors and quality of investment / advances to others.
The said future risk factors provides impact of contingent liability, foreign exchange risk, impact of merger 7 demerger / expansion, cash flow adequacy and impact of diversion of funds.
The said computer readable program code means configured for analysing trends covers financial parameters of net sales, profit before tax, operating cash flow a s a percentage of total debt and total current assets as a percentage of short term borrowings.
The said PMS index is the aggregation of the maximum score against each said category.
The said computer readable program code means configured for analysing financials provides a mechanism for assessing objective factors of gross sales growth rate, operating profit before depreciation, interest and tax, as percentage of sales, short term borrowings as percentage of net sales, operating cash flow as percentage of total debt and net operating cash flow as percentage of total debt.

The said computer readable program code means configured for evaluating market position factors provides mechanism for determining competitive position, input related risk, production related risk, product related risk, price competitiveness and market related risks.
The said operating efficiency evaluation computer readable program code means provides operating leverage, inventory turnover, credit period allowed and credit period availed, and ratio of net sales to current assets, as herein defined.
BRIEF DESCRIPTION OF THE FIGURES
The invention will now be described with reference to the accompanying drawings.
Fig. 1 shows a credit rating computing system according to this invention.
Fig. 2 shows the data source for the operation of this invention.
Fig. 3 shows a flow chart of the operation of the invention
Fig. 4 shows a flow chart of the operation of the analysis of financial performance
Fig. 5 shows a flow chart of the operation of the analysis of business position
Fig. 6 shows a flow chart of the operation of the management performance
Fig. 7 shows a flow chart of the Preventive Monitoring System for measurement of

the conduct of account.
As shown in figure 1, a computing system for credit risk rating assessment using this invention incorporates a central processing unit (1.1), Display unit (1.2), Secondary Storage (1.3), System Bus (1.4) and Memory (1.5) containing Financial Analysis Means (1.6), Business Position Analysis Means (1.7), Management Performance Analysis Means (1.8), and Preventive Monitoring System (1.9). Also a company-wise audited financials database (1.10) provides the data used by the system for measuring the credit risk rating of clients.

Figure 2 shows the data sources for each of the operations. Financial performance analysis (2.3). Business Position analysis (2.4) and Management Performance analysis (2.5). utilize the audited financials of the client obtained from the company-wise audited financials database (2.1) as well as subjective data (2.7. 2.8 and 2.9 respectively) supplied by the individual conducting the credit rating assessment. The conduct of account analysis (2.6) however is on the basis of the Preventive Monitoring System database (2.2) relating to the conduct of the account for each client. In addition, subjective data (2.10) is provided by the credit risk rating assessor. The movement of the PMS Index influences the credit risk rating of the client.
The top level flow chart of the operation of the Credit Risk Rating System is shown in Figure 3. The credit risk rating assessor initially identifies a peer group considering all the industry segments in which the client operates (3.1). The system then extracts the peer group data (3.2) from the company-wise audited financials database and generates peer group performance measurement parameter values (3.3). A financial performance analysis is then conducted (3.4) against peer group relative parameters as well as absolute benchmark parameters using the client's audited financials data obtained from the company-wise audited financials database duly adjusted for future risk, trend evaluation & subjective assessment of financials. This analysis yields a score-A value. The business position of the client is then evaluated (3.5) against some peer group relative parameters to provide a business position score, which is adjusted for industry prospects to get Score - B. the Management performance is assessed (3.6) against defined performance parameters to generate score-C. The conduct of the client account is quantitatively measured (3.7) using the Preventive Monitoring System against defined parameters using the data obtained from the operations of the clients' account, to evaluate score-D. Finally, the 4 scores (Score-A. Score-B. score-C and score-D) are aggregated to generate the final rating (3.8).
Figure 4 shows a flow chart defining the operation of the financial analysis system. A peer group comparison is conducted (4.1) with the selected peer group using the identified financial ratios listed below.

Parameter
Gross Sales Growth Rate (%)
OPBDIT / Sales (%)
Short term Bank Borrowings / Net Sales (%)
Operating Cash Flow / Total Debt (%)
Net Operating Cash Flow /Total Debt (%)
The Gross Sales growth rate of the company -is based on compounded annual growth rate ever the past three years.
An absolute comparison of financial performance is conducted (4.2) on 6 key financial ratios
against specified benchmark values as shown below:

(Table Removed)
A Subjective Assessment of the clients financials is carried out (4.3). The purpose of subjective assessment of financials is to make an analysis of the reliability of financials furnished in the audited balance sheet. The analysis is done on the following four parameters.
(Table Removed)

transparency in Accounting is assessed with relevance to the clients" maintenance of accounts, accounting principles, auditor's qualifying remarks and such other factors, which are quantified and the impact thereof on the company's net worth is evaluated.
The Quality of inventory and Readability of debtors data, assesses the extent of realisable value of inventory & debtors in comparison to the book value. The purpose of such evaluation is to assess the likelihood of deterioration in clients' financials. if any.
The Quality of Investment is assessed on the following three parameters in sequential order
1 Quantum of Investment in comparison to the Net Worth
2 Market value of such investments in comparison to book value, erosion if any and its
impact on net worth
3 Return on such investment in comparison to market return.
The aggregate score obtained is used to discount the previous scores using a discounting matrix as shown below:
(Table Removed)

The trends of the following 4 parameters are evaluated (4.4) to assess the client's performance in the last three years.
TREND ADJUSTMENT
(Table Removed)

The above parameters are evaluated in terms of direction, magnitude and variability.
The following factors are evaluated to assess the future risk aspects (4.5) of the client's financials.

Future Risk: Parameter
Impact of Contingent Liability
Foreign Exchange Risk
Impact of merger/demerger/expansion on key financials
Cash flow adequacy
Impact of diversion on future financials
Impact of Contingent Liability is assessed with reference to the aggregate contingent liability & the likely devolvement of such liability. The quantification of such contingent liabilities are compared to the clients' net worth to determine possible impact.
The Foreign Exchange Risk, is assessed from the aspect of transaction risk and the portfolio risk and is further quantified and analysed with respect to unhedged exposure and its possible impact on net worth.
The Impact of merger / demerger is evaluated on the basis of three key financial ratios:
• Current Ratio
• Debt/Equity ratio
• ROCE
The assessment is in terms of the likely ratios that may emerge at the end of the rating period compared with absolute benchmark values.
On Diversion of Funds, the purpose is only to identify the reason for such diversion, as the quantum of diversion is already evaluated in the absolute comparison parameters. The purpose of the diversion of fund impacts the future risk.
The aggregate weighted score of parameters under peer group assessment and absolute assessment is discounted by the subjective assessment and then further discounted by the trend assessment scores. The score so obtained is aggregated with the score under future risk assessment to arrive at score A on weighted average.

BUSINESS
The Business Position Assessment is conducted in terms of the Operating Efficiency and Market Position. Operating Efficiency is evaluated with respect to the peer group (5.1) based on 11 parameters of which the assessor selects the most relevant 5 parameters applicable to the industry in which the client operates. The data for comparison is derived from the peer group data.
(Table Removed)
* Only five out of eleven parameters are to be selected, while operating leverage is compulsory, any four other parameters are to be chosen. All parameters carry equal weight.
The Market position of the client is assessed (5.2) on the basis of important / relevant parameters out of the 7 listed below. Each main parameter is derived from sub parameters that are rated individually with the assessor exercising the discretion of selecting the most appropriate sub parameters. The evaluation of each sub-parameter is done from the perspective of the client's position vis-a-vis the peer/industry in which the client operates. The average value / score of all the sub parameters determines the score for the main parameter.
(Table Removed)

Assessor is required to select most important parameters/ factors applicable to the industry segment being evaluated. All the parameters/ factors within the parameters carry equal weight. Assessor can select any number of factors and can add up to two additional factors under each parameter.
The weighted average of the two scores shown above are adjusted for industry score, as per matrix below to determine score-B.
(Table Removed)

The evaluation of Management Performance is based on both objective and subjective analysis.
The objective evaluation is performed (6.1) to determine the capability of management to achieve the budgeted sales & profits. The subjective evaluation (6.2) assesses the willingness of the management and its capability to run the company on the basis of 7 parameters:
(Table Removed)
The weighted average of all the parameters determines score-C (6.3)
Figure 7 shows the Preventive Monitroring System (PMS) for measuring the Conduct of Account. The PMS scrutinizes the clients conduct of account database for the previous one year period to identify negative factors under 10 categories.
Each category includes several parameters that are individually measured based on available data. The score against each parameter is aggregated for the past one year period (7.11). the parameter with the maximum aggregate score is selected from each category (7.12) and its score is used to represent the category (7.13). The scores of all the categories are totalled (7.14) to arrive at the PMS Index Score (7.15). which corresponds to a PMS Rank (7.16). The PMS Rank is finally converted to a PMS rating score (7.17).
Score under A to D will be aggregated on the weighted average basis as under:
Parameter
Parameter weight
Financial strength 40 %
Business & industry 30 %
Management 20 %
Conduct of account 10%
The system described above is referred to as PNBTRAC (Punjab National Bank Techniques For Risk Assessment of Credit).

A. STATUS OF DOCUMENTATION/ SECURITY CREATION/ TERMS OF
SECTION
(Table Removed)
B. STATUS OF FINANCIAL DISCIPLINE
(Table Removed)
C. OPERATIONAL & FINANCIAL PERFORMANCE INDICATORS
(Table Removed)

D. STATUS/QUALITY OF BILLS REALISATION
(Table Removed)
E. STATUS OF FEED BACK BY THE BORROWER
(Table Removed)
E. LEVEL OF CURRENT ASSETS & CURRENT LIABILITIES
(Table Removed)
G, STATUS OF SECURITY VALUE
(Table Removed)
H. IRREGULARITY IN THE ACCOUNT WITH US
(Table Removed)
I. IRREGULARITIES WITH OTHER BANKS/FIs, ETC.
(Table Removed)
.3. OTHER IMPORTANT DEVELOPMENTS
(Table Removed)

Documents:

27-del-2002-abstract.pdf

27-del-2002-claims.pdf

27-del-2002-correspondence-others.pdf

27-del-2002-correspondence-po.pdf

27-del-2002-description (complete).pdf

27-del-2002-drawings.pdf

27-del-2002-form-1.pdf

27-del-2002-form-19.pdf

27-del-2002-form-2.pdf

27-del-2002-form-3.pdf

27-del-2002-gpa.pdf

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Patent Number

217341

Indian Patent Application Number

27/DEL/2002

PG Journal Number

37/2008

Publication Date

12-Sep-2008

Grant Date

26-Mar-2008

Date of Filing

15-Jan-2002

Name of Patentee

PUNJAB NATIONAL BANK

Applicant Address

HEAD OFFICE, 7-BHIKAJI CAMA PLACE, NEW DELHI-110 066, INDIA.

Inventors:

#	Inventor's Name	Inventor's Address
1	NARAYANAN PARANDARAMI BALASUBRAMANIAM	PUNJAB NATIONAL BANK, HEAD OFFICE, 7-BHIKAJI CAMA PLACE, NEW DELHI-110066, INDIA.
2	DEB BIJON KISHAN	PUNJAB NATIONAL BANK, HEAD OFFICE, 7-BHIKAJI CAMA PLACE, NEW DELHI-110066, INDIA.
3	BALASUBRAMANIAN ACHUTHARAMAN	PUNJAB NATIONAL BANK, HEAD OFFICE, 7-BHIKAJI CAMA PLACE, NEW DELHI-110066, INDIA.
4	JAI JANAK RAJ	PUNJAB NATIONAL BANK, HEAD OFFICE, 7-BHIKAJI CAMA PLACE, NEW DELHI-110066, INDIA.
5	JAIN, MAHESH KUMAR	PUNJAB NATIONAL BANK, HEAD OFFICE, 7-BHIKAJI CAMA PLACE, NEW DELHI-110066, INDIA.
6	JAIN, VIJYENDRA KUMAR	PUNJAB NATIONAL BANK, HEAD OFFICE, 7-BHIKAJI CAMA PLACE, NEW DELHI-110066, INDIA.
7	CHAUDHARY RAVINDER SINGH	PUNJAB NATIONAL BANK, HEAD OFFICE, 7-BHIKAJI CAMA PLACE, NEW DELHI-110066, INDIA.

PCT International Classification Number

G06F 17/60

PCT International Application Number

N/A

PCT International Filing date

PCT Conventions:

#	PCT Application Number	Date of Convention	Priority Country
1			NA