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    Credit Evaluation

    Uploaded by

    Saumyashree Singh
    The document discusses different methods used in credit analysis and risk assessment. It covers traditional methods of evaluating character, capacity, capital, collateral and conditions. It also describes numerical credit scoring which assigns weights to relevant factors and rates customers to classify their risk. The document also discusses discriminant analysis, risk classification schemes, controls of accounts receivables including days' sales outstanding and ageing schedules.

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    Credit Evaluation

    Uploaded by

    Saumyashree Singh
    46 views13 pages
    The document discusses different methods used in credit analysis and risk assessment. It covers traditional methods of evaluating character, capacity, capital, collateral and conditions. It also describes numerical credit scoring which assigns weights to relevant factors and rates customers to classify their risk. The document also discusses discriminant analysis, risk classification schemes, controls of accounts receivables including days' sales outstanding and ageing schedules.

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    The document discusses different methods used in credit analysis and risk assessment. It covers traditional methods of evaluating character, capacity, capital, collateral and conditions. It also describes numerical credit scoring which assigns weights to relevant factors and rates customers to classify their risk. The document also discusses discriminant analysis, risk classification schemes, controls of accounts receivables including days' sales outstanding and ageing schedules.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    46 views13 pages

    Credit Evaluation

    Uploaded by

    Saumyashree Singh
    The document discusses different methods used in credit analysis and risk assessment. It covers traditional methods of evaluating character, capacity, capital, collateral and conditions. It also describes numerical credit scoring which assigns weights to relevant factors and rates customers to classify their risk. The document also discusses discriminant analysis, risk classification schemes, controls of accounts receivables including days' sales outstanding and ageing schedules.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
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    Types of Errors

    Type I error
    Type II error
    Traditional Credit Analysis
    Character
    Capacity
    Capital
    Collateral
    Conditions
    Should Credit
    be Granted?

    Character

    Strong Week

    Capacity Capacity

    Strong Week Strong Week

    Capital Capital Capital Capital


    Week Strong

    Strong Week Strong Week Strong Week

    Excellent risk Fair risk Doughtful Risk Dangerous


    Risk

    How much
    credit should
    be granted?
    Numerical Credit Scoring
    Identify factors relevant for credit evaluation.
    Assign weight to these factors that reflect there
    relative importance.
    Rate the customer on various factors, using a suitable
    rating scale.
    For each factor, multiply the factor rating with the
    factor weight to get factor score.
    Add all the factor scores to get overall customer rating
    index.
    Based on the rating index, classify the customer.
    Credit Rating Index
    Factor Factor Rating Factor Score
      weight 5 4 3 2 1  
     

    Past payment 0.30           1.20


    Net profit 0.20           0.80
    margin
    Current Ratio 0.20           0.60
    Debt-equity 0.10           0.40
    ratio
    Return on 0.20           1.00
    equity
    Rating index 4.00
    Discriminant Analysis
    Risk Classification Scheme
    Risk Class Description
    1 Customer with no risk of default
    2 Customer with negligible risk of default
    3 Customer with little risk of default
    4 Customer with some risk of default
    5 Customers with significant risk of default
    Controls of Accounts Receivables
    Days’ Sales Outstanding
    The days’ sales outstanding at a given time t may be
    defined as the ratio of accounts receivable outstanding
    at that time to average daily sales figure during the
    preceding 30 days, 60 days, 90days or some other
    relevant period.

    Accounts receivables at time t


     DSOt = --------------------------------------
    Average daily sales
    Sales and Receivables Data

    Month Sales Receivables Month Sales Receivables

    January 150 400 July 190 340

    February 156 360 August 200 350

    March 158 320 September 200 350

    April 190 310 October 220 380

    May 170 300 November 230 400

    June 180 320 December 240 420


    Ageing Schedule
    Age Group (in days) Percent of Receivables

    0-30 35

    31-60 40

    61-90 20

    More than 90 5
    Collection Matrix
    Percentage of Receivables January February March April May June
    Collected During the Sales Sales Sales Sales Sales Sales

    Month of sales 13 14 15 12 10 9

    First following month 42 35 40 40 36 35

    Second following month 33 40 21 24 26 26

    Third following month 12 11 24 19 24 25

    Fourth following month - - - 5 4 5

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