Rating Models and Validation - Oesterreichische Nationalbank

Rating Models and Validation
that it is necessary to analyze whether the companyÕs orientation in terms of
customers and products also indicates future success on its specific market.
In individual cases, external ratings can also be used as an additional source
of information. If such ratings are not available, credit reporting information on
companies which prepare balance sheets is generally also available from independent
credit reporting agencies.
Businesses and Independent Professionals
(not preparing balance sheets)
The main difference between this subsegment and the enterprise types discussed
in the previous sections is the fact that the annual financial statements
mentioned above are not available. Therefore, lenders should use other sources
of quantitative data — such as income and expense accounts — in order to ensure
as objective a credit assessment as possible. These accounts are not standardized
to the extent that annual financial statements are, but they can yield reliable
indicators of creditworthiness.
Due to the personal liability of business owners, it is often difficult to
separate their professional and private activities clearly in this segment. Therefore,
it is also advisable to request information on assets and liabilities as well as
tax returns and income tax assessments provided by the business owners themselves.
Information derived from bank account activity data can also serve as a complement
to the quantitative analysis of data from the past.
In this segment, data related to the past also have to be accompanied by a
forward-looking analysis of the borrowerÕs debt service capacity.
On the qualitative level, it is necessary to assess the same data categories as
in the case of companies which prepare balance sheets (market, industry, etc.).
However, the success of a business owner or independent professional depends
far more on his/her personal characteristics than on the management of a complex
organization. Therefore, assessment focuses on the personal characteristics
of the business owners — not the management of the organization — in the case of
these businesses and independent professionals. As regards external data, it is
advisable to obtain credit reporting information (e.g. from the consumer loans
register) on the business owner or independent professional.
Small Businesses
In some cases, it is sensible to use a separate rating procedure for small businesses.
Compared to other businesses which do not prepare balance sheets,
these businesses are mainly characterized by the smaller scale of their business
activities and therefore by lower capital needs. In practice, analysts often apply
simplified credit assessment procedures to small businesses, thereby reducing
the data requirements and thus also the process costs involved.
The resulting simplifications compared to the previous segment (business
owners and independent professionals who do not prepare balance sheets)
are as follows:
— Income and expense accounts are not evaluated.
— The analysis of the borrowerÕs debt service capacity is replaced with a simplified
budget calculation.
20 Guidelines on Credit Risk Management