VALIDATION OF CREDIT RISK RATING MODEL

Abstract

This report basically highlights how the credit is rated in the bank of baroda and based on that rating how interest rate is charged from different customers based on their credit score. To understand the various parameters that is taken into account while rating borrowers the report has been made. Since ratings are subjective in nature and the grades assigned by the rating officers are discretionary, the main factors which is deduced by surveying the rating officers at different branches of the Bank. This has been done by using a questionnaire and then applying Factor Analysis to the responses so obtained. On applying this tool seven important factors have been obtained which play a significant role in determining ratings. These are: 1.Gap between demand and supply 2. Ability of the borrower to raise debt

3.Managerial competence of the borrower

4.Financial strength of the borrower

5.Past Payment record

6.Net worth of the company

7.Adequacy of security coverage

Further, Analytical Hierarchy Process, an Operations Research tool, has been applied using Excel applied in order to obtain a hierarchy of factors which affect ratings of the different Borrower models namely Large Corporate model, Small and Medium Enterprise model, Infrastructure (Power) model and Trader model. The hierarchy so obtained gives an idea of the main risk factors which should be effectively managed so as to obtain improved ratings which in turn enable the borrower in negotiating interest rates.