SME Credit Risk Model
Research Team:
Dr. Ashraf Al Mamun
Professor, BIBM
Dr. Md. Mosharref Hossain
Associate Professor, BIBM
A. N. K. Mizan
Former Assistant Professor, BIBM
Bangladesh Institute of Bank Management
Mirpur 2, Dhaka
1
Appendix I: Credit Scoring Model
Credit Scoring Model for Small Enterprise
Borrower:
Branch: Date of Assessment:
Type of Business: Manufacturing Service Trading
Acceptable Score: > 65
Total Score Grading
Calculated Score
Criteria Weight Parameter Score
Value Obtained
1. Financial Factors 25%
Liquidity (×) Times Less than 0.5× 0
CA/CL 0.5 - 0.99× 1
1- 1.24× 2
> 1.25× 3
Sales Growth (Last Two Years) Less than 1% 0
(Current Year's Sales / Previous Year's Sales)-1 1% - 5% 0.5
5.01% - 10% 1
10.01% - 15% 1.5
15.01% - 20% 2
20.01% - 25% 2.5
> 25% 3
Operating Profit Margin Less than 0 0
(Operating Profit/Sales) *100 0 - 5% 0.5
5.01% - 10% 1
10.01% - 15% 1.5
15.01% - 20% 2
20.01% - 25% 2.5
More than 25% 3
Debt Equity Ratio (×) Times > 2× 0
Total Debt/Total Equity 1.51 - 2× 0.5
1.1 - 1.5× 1
0.81 - 1.1× 1.5
0.51 - 0.80× 2
0.21 - 0.50× 2.5
< 0.20× 3
Debt Service Coverage Ratio Less than 1× 0
Operating Profit/(Total Interest + CMLTD*) 1 - 1.5× 1
*current matured portion of long-term debt 1.51 - 2× 1.5
More than 2× 2
Bad Debt (Receivable) More than 15% 0
(Gross credit sales - Collection)/Total credit sales 10.01% - 15% 0.5
5.01% - 10% 1
0 - 5% 1.5
No default 2
Receivable Turnover in days More than 90 0
Total Credit Sales/Sales per day 60 - 89.99 1
30 - 59.99 1.5
Less than 30 2
Payables Turnover in Days 0 days 0
Accounts Payable/Cost of Goods Sold per day 1 - 15 days 1
15.01 - 30 days 1.5
30.01 - 45 days 2
45.01 - 60 days 2.5
> 60 days 3
Asset Utilization Ratio < 1% 0
(Net Income to Total Asset) 1% -10% 1
10.01% - 20% 1.5
> 20% 2
Assets Growth Less than 5% 0
(CYA / PYA)-1 5.01% - 10% 1
10.01% - 15% 1.5
More than 15% 2
Total Score 25
2
2. Business and Industry Calculated Score
30% Parameter Score
Factors Value Obtained
Age of Business < 1year 0
1 - 2 years 1
2 - 5 years 1.5
> 5 years 2
Legal Form of Business Proprietorship 1
Partnership 1.5
Private limited 2
Experience of the Entrepreneur No experience 0
Up to 1 year 1
1 to 3 years 2
More than 3 years 3
Client Concentration Up to 2 0.5
(No. of Major Buyers) 3-6 1
7 - 10 1.5
More than 10 2
Payment Behaviour with Supplier > 50 days PD 0
(Payment dues to suppliers in days) 31 - 50 days PD 1
11 - 30 days PD 1.5
0 - 10 days PD 2
Industry Condition Cause of concern 0
Slightly uncertain 1
Average 2
Excellent 3
Market Competition Highly competitive 0
Moderately competitive 1
Less competitive 1.5
Dominant player 2
Reputation of the Business/Client No reputation 0
(Based on banker's wisdom) Poor reputation 1
Fair to good reputation 1.5
Very good reputation 2
Premises Status of Business Rental but not sufficient 0
Rental 1
Family owned 1.5
Personally owned 2
Entry Exit Barriers Easy 0
Average 1
Difficult 2
Linkage with other Firms No linkage 0
Only forward/backward 1
Both forward and backward 2
Succession No succession 0
Succession 1-3 years 1
Succession 0-1 year 2
Ready succession 3
Business Books and Records No record at all 0
Unstructured record 1
Structured but not as per FS 2
Structured and as per FS 3
Total Score 30
3
3. Relationship and Security Calculated Score
Parameter Score
Factors 25% Value Obtained
Limit Utilization Bellow 40% 0
(In case of credit facilities used by the client) 40.01% - 50% 1
50.01% - 60% 2
More than 60% 3
Deposit Statements (Any formal Financial Institution) No deposit statement 0
Figures in Thousands TK. Confirmed and (0 - 20) 1
Confirmed and (20.01 - 50) 2
Confirmed and (> 50) 3
Repayment Record More than 60 days due 0
45 - 60 days due 1
30 - 45 days due 2
Up to 30 days 3
Returned Cheques Often 0
Sometimes 1
Rare 2
Never 3
Relationship with Bank (s)/NBFIs No relationship 0
Less than one year 1
One - five years 2
More than five years 3
Security Coverage (Collateral) No collateral 0
(Value of the asset/Requested amount of loan) *100 1% - 10% 0.5
10.01% - 30% 1
30.01% - 50% 2
More than 50% 3
Security Coverage (Primary) No security 0
Simple hypothecation 1
Registered hypothecation 2
Fully pledged/mortgaged 3
Marketability of securities More than 90 days 0
61 - 90 days 1
31 - 60days 1.5
Up to 30days 2
Availability of Group/Social Guarantee Not available 0
Available but not strong 1
Strong 2
Total Score 25
4
Calculated Score
4. Manufacturing Concern 20% Parameter Score
Value Obtained
Availability of Raw Materials Not Sufficiently available 0
100% imported 0.5
Imported and local 1
Indigenous sources 2
Number of Major Raw Materials Supplier No certain supplier 0
Up to two 1
Three - five 1.5
More than five 2
Skill of the Entrepreneur about the Product Unskilled 0
or Production Process Semi Skilled 1
Some technical knowledge 1.5
Highly skilled 2
Availability of Machineries Not Available & no technical
0
and Spare Parts support
Less available &technical
1
support is costly
Available but technical
1.5
support is costly
Highly available and easy to
2
maintain
Technology Foreign 0.5
Domestic 1
Storing Capacity Not sufficient 0
Sufficient but not appropriate 1
Sufficient and appropriate 2
Storability (Finished Product) No storability 0
Less than 5 days 0.5
5 - 30days 1
More than 30days 2
Seasonality of the Product Highly seasonal 0
Less seasonal 1
No seasonality 2
Availability of Skilled Labor Rare 0
Partly available 1
Available 2
Inventory Turnover in Days More than 60 days 1
31- 60 days 2
Less than 30 days 3
Total Score 20
Grand Total 100
5
Calculated Score
4. Trading Concern 20% Parameter Score
Value Obtained
Origin of the Product Not certain (Pirated) 0
Imported 0.5
Domestic 1
Nature of Goods Highly perishable 1
Partly perishable 1.5
Not perishable 2
Warehouse Facilities No warehouse facility 0
Not enough 1
Enough but not appropriate 2
Enough and appropriate 3
Substitute Products Close substitute product 1
Moderately substitute product 2
No substitute product 3
Distribution of the Products Retail 1
Wholesale 1.5
Retail + wholesale 2
Distribution Channel Weak distribution channel 0
Depends on buyer's vehicle 1
Rental vehicle 2
Own vehicle 3
Selling Mode More than 90% on Credit 0
70.01% - 90% on credit 0.5
50.01% - 70% on credit 1
30% - 50% on credit 1.5
Less than 30% on credit 2
Nature of the Buyer Irregular buyer 0
Regular buyer 0.5
Confirmed Regular buyer 1
Inventory Turnover in days More than 60 days 1
31 - 60 days 2
Less than 30 days 3
Total Score 20
Grand Total 100
6
Calculated Score
4. Service Concern 20% Parameter Score
Value Obtained
Location of the Business Not at suitable place 1
Suitable but not the best 2
Prime location 3
Quality of Service Poor 0
Good 1
Very good 2
Outstanding 3
Client Concentration Up to 2 0.5
(No. of Service Recipient) Three to six clients 1
Seven to ten Clients 1.5
More than 2
Seasonality of the Service Highly seasonal 1
Less seasonal 2
No seasonality 3
Target Market Widely focused 1
Moderately wide 2
Narrowly focused 3
Substitute Services Close substitute 1
Moderately substitute 2
No Substitute services 3
Nature of the Buyer Irregular buyer 1
Regular buyer 2
Confirmed regular buyer 3
Total Score 20
Grand Total 100