Credit Risk Grading and CRG Score

Credit Risk Grading score calculation is the basic module for developing a credit risk management system. It arranges a number or symbol as a primary indicator of total risk involved in credit or loans in business. All banks should adopt a credit risk grading system. This grading or process allows bank management to manage risk to optimize returns. Credit Risk Grading or Credit Risk Grading score calculation is a great tool for measuring credit risk. It directly works for credit risk management. It helps to determine credit risk for banks and financial institute. This credit risk grading system is vital to take decisions both before or after approval of loan facilities of customer. Before sanction of credit it helps to decide to give loan or not. It assists helps directly banks and financial institutions for safe and sound finance and better decision making. This allows bank management to observe change and trends in terms of risk. This process also helps to manage risk and to optimize or minimize risk.

Diverse Credit Risk Grading (CRG) under:

A reasonable meaning of the diverse classes of Credit Risk Grading is given as takes after:

Superior – (SUP) – 1; Good-(GD)=2; Acceptable – (ACCPT)- 3; Marginal/Watchlist-(MG/WL)- 4; Special Mention-(SM)- 5; Substandard – (SS)- 6; Doubtful – (DF)- 7; Bad/Loss – (BL)- 8          

Credit Risk Grading Score:

SUP Fully cash secured, secured by Government/International Bank Guarantee
Good    85+
Acceptable   75-84
Marginal/Watchlist   65-74
Special Mention 55-64
Substandard   45-54
Doubtful 35-44
Bad & Loss <35

Risks involve in CRG:

Financial Risks: Risk that occurs for loan clients due to financial distress, This typically entails analysis of financials.Financial risks are- Leverage (15%), Liquidity(15%), Profitability (15%), Coverage (5%)

Business or Industry Risk- Unfavorable condition or adverse business situation will affect borrower capacity to meet the obligation. It includes-Size of Business (5%), Age of Business (3%), Business outlook (3%), Industry Growth (3%), Market Competition (2%), Entry or Exit Barriers (2%)

Management Risk: It represents poor management condition and also includes-Experience (5%), Succession (4%), Team Work (3%)

Security Risk: Risk that occurs due to poor quality or strength of security in case of loan non repayment. It includes: Security Coverage (4%), Collateral Coverage (4%), Support (2%)

Relationship Risk: It includes: Account Conduct (5%), Utilization of Limit (2%), Compliance of loan conditions (2%), Personal Deposit (1%)

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