Screencast of Expert Judgement SME Rating Prototype

Building an Expert Judgement Credit Rating Tool for SME and Corporate Banking Customers

One of the key elements in improving the quality, consistency and efficiency of SME, and wider commercial and corporate banking, is the application of credit analysis and assessment tools. Sometimes called 'credit decisioning systems', these include a wide range of statistical and qualitative approaches. Increasingly these tools are also often demanded by regulators looking to implement improved capital management practices in their jurisdiction. In this case, we are going to take a deep dive into the expert judgement scorecard approach, in its many variations the most popular and practical approach for most commercial banks operating in most markets.

Screencast of Expert Judgement SME Rating Prototype

In the last post, we introduced the graphic below to illustrate the building blocks of an SME credit rating tool. Our approach builds an individual customer rating from four distinct components. These include 'exogenous' criteria such as the Industry Sector. These are criteria that the customer cannot really change (assuming they don't radically change their mission or business model). In which case, it may be necessary to reclassify them.

We supplement this with a 'Customer Profile' that captures some additional intangible characteristics of the firm. These are characteristics such as ownership structure, size, growth prospects, intellectual capital, or longevity for example, or even identifiable values and behaviours of owner/ managers (e.g. entrepreneurialism, risk appetite, ambition etc.).

The combination of these two factors creates a 'Segment' rating that is static and 'through-the-cycle' for any given firm. This supports active portfolio planning and management, and can dovetail nicely with a variety of approaches to market segmentation.

Towards the other end of the spectrum we have the 'endogenous' criteria. These are criteria that are specific to individual firms within the same segment. Management more or less has control (or should have) of its exposure to business specific risks and the management of its own finances.

The total of these building blocks gives us the total score and combined customer rating. Clear enough I hope, but we'll be getting into more detail in future posts, starting with defining and creating an Industry Sector rating. In the meantime, perhaps the screencast below will illustrate how these four elements hang together in the overall risk rating tool. However, don't hesitate to contact me if you have any queries or comments. I look forward to your feedback.