Download - Loan Pricing & Credit Rating_sep,13
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LOAN PRICING
&
CREDIT RATING
SEPTEMBER,2013
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LOAN PRICING
Main constituents :
Cost of Funds Deposit mix
Servicing costs Retail / Wholesale loan
Risk Premium External Rating / Internal Rating
Desired profit margin Shareholdersexpectation * Capital / Assets
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BPLR / BASE RATE
BPLR :BanksPrime Lending RateCost of funds + Admin cost + Profit margin
Base Rate :Minimum rate at which Bank will lend
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CREDIT RATING - INTERNAL
After analysing the financial statements and due
diligence of the facts gathered, the conclusion reachedhave to be put together and evaluated in a holistic
manner to arrive at a meaningful decision.
Each of the factors have to be viewed in the right
perspective and given the weight age it deserves.
Notwithstanding absolutely wonderful financial ratios, acompany may have to be denied credit facilities because
the analysis of the management capabilities and
competitive scenario reveals weaknesses.
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CREDIT RATING - INTERNALCredit Rating system is developed by studying the data
relating to a large number of accounts and their performancein the past.
All the variables which have predictive value in assessing the
future performance of a company will be identified andappropriate weight ages assigned to each of them.
Each of the factors may be assessed on a scale of 1 to 5, 1
being the best and 5 being the worst.
Depending upon the weight ages, the aggregate score is then
used to arrive at the final rating of the borrower.
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CREDIT RATING - EXTERNAL
I. Analysis of financial statements may give a good
account of a company.
II. Their growth over the years may be better than theirpeers and the company may appear to do well on all
parameters.
III. However, if the industry or the economy is at the peakof a business cycle and a decline is imminent, it may
not be prudent to take on or increase the exposure.
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CREDIT RATING - EXTERNAL
IV. The status and the prospects of industry must be
studied carefully before taking a lending decision.
V. Reports of investment analysts and industry studies
easily accessible on the web can be rich sources ofinformation to take a balance credit decision.
VI. The websites of brokerage houses like ICICI Direct,
India Infoline etc., The Credit Rating agencies likeCRISIL, ICRA and data companies like CMIE are
good sources of information on industries and
companies.
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THANK YOU