By:-

AMNA
TAHIR
Management
Associate

Employee No.22224

Management Associate

A REVIEW ON CORPORATE
CREDIT RISK ASSESSMENT
AND ITS MITIGATION
Table of Contents
Section-1: CREDIT RISK ASSESSMENT ............................................................... 3
Section-2: CORPORATE LENDING PROCESS FLOW FROM CUSTOMER
ONBOARDING TO LOAN APPROVAL, COVERING RISK ASSESSMENT AND ITS
MITIGATION ....................................................................................................... 12

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

Section-3: CASE STUDY (PRACTICAL EXAMPLE OF CORPORATE CREDIT RISK
ASSESSMENT AND ITS MITIGATION: ............................................................. 24
Section-4: SIGNIFICANCE OF CREDIT RISK ANALYSIS……………………………………...36

Section-5: RISK ANALYSIS PROCESS FLOW ..................................................... 37

1
 A REVIEW ON CORPORATE CREDIT RISK
ASSESSMENT AND ITS MITIGATION
Abstract
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

The report has been designed to examine credit risk

ABSRACT
assessment and its mitigation in Bank of Punjab corporate
department specifically. The given topic is corporate credit
risk assessment and its mitigation. The report has been
written in a specific sequence, in order to make it easily
understandable by every reader. Initial opening of report
describes credit risk assessment which encompasses concept
of credit risk at first, that is, risk of customer default on the
debt obligations. Credit risk assessment is described in detail.
Then report proceeds with the types of credit risk in terms of
business transactions. Then most important part of report
comes that is credit risk assessment through 5 Cs of credit.
Detailed explanation of risk assessment is given in terms of 5
Cs of credit. Then default probability, loss given default and
exposure at default is explained as factors affecting credit risk
assessment. Afterwards, corporate lending process flow from
customer onboarding to loan approval, covering risk
assessment and its mitigation is given in detail. Then case
study is given to demonstrate the practical example of how
lending process covers the risk assessment and its mitigation.
Significance of credit risk assessment comes next, which is
again very important part of the report. Risk analysis process
flow is explained afterwards that who initiates the lending
case and then from how many approvals it passes through,
complete detail is given. Then the report ends with short
conclusion paragraph encompassing all findings of the report.
In nutshell, credit risk assessment and its mitigation holds a
great importance in lending process of banks as it’s the sole
way to safeguard bank’s interest in lending.

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1. CREDIT RISK ASSESSMENT:

Before heading towards corporate credit risk assessment, credit risk is prior term which
leads towards the conception of corporate credit risk. Now the question arises that what
credit risk actually is? Credit risk is usually taken as assessment of borrower’s

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

creditworthiness. Credit risk is basically calculated by lenders through estimation of chances
of recovering the full amount of their loan involving principal as well as interest payments,
within the specified time period. And this practice of calculating credit risk should be
applicable prior to approve any loan because once loan is disbursed, consequences of
handling credit risk prove to be potential loss for any lender. Lower interest rates are applied
to borrowers who are deemed to pose a low credit risk (Credit Risk, n.d.). Concept of credit
risk revolves around default of any borrower. Credit risk exists, whenever there is any
likelihood of a default. Credit risk is also taken as the potential for a borrower to renege on
debt by skipping payments. This default in repaying loan payments, becomes a potential loss
for the lenders. These losses are very harmful for the financial stability of any lending
institution. Losses may occur in variety of circumstances. Existence of loss in any form,
becomes the indicator of credit risk existence. Consumer inability to make regular payments
on credit instruments, ultimately lead towards existence of credit risk. Default on payments
of credit instruments is basically actual reason of credit risk existence (Credit risk, n.d.).

Assessment of credit risk is very important step in the process of lending. All the steps of
credit risk assessment should always be taken prior to disbursement of loan amount
because once a bad or substandard loan amount is disbursed then lender is left with the
outcome of loss. Then various measures to cope up the loss can be taken but why not to
avoid happening of loss through credit risk assessment. Assessment of credit risk basically
encompasses the estimation of likelihood of loss due to borrower’s inability to pay back loan
amount (Credit Score vs Credit Risk Assessment: What’s The Difference?, 2022).

As per credit policy manual of the Bank of Punjab, borrower’s unwillingness or inability to 3
meet the debt obligations becomes the absolute cause for the existence of credit risk and
this credit risk then becomes economic loss for the bank. This loss can be in the form of
 rescheduling/restructuring compensations offered to the borrower for recovery of loan
amount. Non-performing loans is the major cost for the bank that is the outcome of
existence of credit risk. Expenses associated with non-performing loans, again loss for the
bank.

Credit risk is defined in credit policy manual in terms of business transactions type as follow:
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

1.1 Credit Risk in terms of business transaction type:

a) Direct Credit Risk:

This type of credit risk involves default by the borrower on any debt obligation or any form
of cash based business transaction. Direct credit risk encompasses direct default on loan
amount granted by the lender.

b) Indirect Credit Risk:

Concept of this type of credit risk is contrary to direct credit risk. Indirect credit risk involves
default by the borrower on repayment of credit facilities utilized by the borrower. Indirect
credit risk is actually funded exposure against credit facilities. Borrower’s inability to honor
the drawings leads towards indirect credit risk.

c) Counterparty Risk:

A participant in a financial agreement between two parties, runs the risk of defaulting on
that agreement, is the base of counterparty risk. This type of default by one of the parties in
an agreement, is taken as counterparty risk. Financial agreement can be of any type like
foreign exchange agreement or any sort of settlement agreements.

Counterparty risk is segregated in two types as follow:

i. Pre settlement risk:

In this type of counter party risk, client defaults prior to execution of agreement. This is loss
to the bank because bank then has to replace that agreement on adverse rate as compared
to the actual contract rate. It surely indicates credit risk.

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ii. Settlement risk:

This type of counterparty risk is kind of more harmful to the bank because the client defaults
on its repayment, after utilizing the credit facility by the bank. In this situation, bank is in
potential loss because bank has delivered its funds, as per agreement. Hence settlement risk
puts the bank at more risk as compared to pre settlement risk.

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

Explanation of credit risk on the basis of business transactions types, is taken from credit
policy manual of the Bank of Punjab, as referred above.

1.1 CORPORATE CREDIT RISK

Required topic of this report is corporate credit risk assessment and its mitigation. Above
part is all about explanation on the term credit risk. Now heading towards corporate credit
risk. Credit risk of corporates is termed as corporate credit risk. There is no difference in the
concept of credit risk and corporate credit risk (Punjab, 2022). Prospects for losses due to
corporate delinquencies come under the umbrella of corporate credit risk. Whenever
corporates default in making regular payments of their loan amounts, warning signal of loss
is called corporate credit risk (Corporate Credit Risk, 2022). So the difference lies in the
entity to be assessed for credit risk. In this study, the entity under assessment of credit risk
will be specifically corporates.

Risk assessment through 5 Cs of credit:

Risk assessment of any entity starts from very important concept called 5 Cs of credit.
Whenever lender has to lend money to any entity, first step to assess credit risk will be 5 Cs
of credit. 5 Cs of credit involves the following in the respective sequence:-

1. Character
2. Capacity
3. Capital
4. Collateral
5
5. Conditions
 Sequence of above mentioned 5 Cs is very important to consider while lending. These 5 Cs of
borrower are assessed prior to loan approval for credit risk assessment. These 5 Cs of
corporates are assessed in the case of corporate credit risk assessment. Credit initiation
decisions are based on these 5 Cs of credit. Assessment of credit risk through 5 Cs of credit is
explained below:
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

Character:

In assessing credit risk of a borrower, character of the borrower is of utmost importance.

Character encompasses an important factor of lending that is assessing credit history of the
borrower and for that purpose, ECIB report of borrower is assessed. ECIB report is basically a
document of State Bank of Pakistan, on which credit history of borrower is displayed. ECIB
stands for Electronic Credit Information Bureau Report. ECIB report shows all debts availed
previously. Every bank is bound to update ECIB reports of all customers monthly. In case of
Bank of Punjab, only one month old ECIB report is accepted because of continuous
changings in credit profile of the customer. ECIB report offers information about the length
and variety of credit history as well as repayment capacity of the borrower. Every ECIB
report carries specific scores which is the representation of credit worthiness of that
borrower. Higher the ECIB score, higher is the chance to avail more credit. No matter
borrower is and individual consumer/SME/Commercial entity/Corporate entity, credit
worthiness is assessed through ECIB report. ECIB reports are assessed after seeking
permission from the specific entity. Thus ECIB report encompasses comprehensive credit
behavior of the borrower. So one of the tool to assess borrower’s character is ECIB report.
Borrower whose ECIB is clean having no defaults, is always given priority while lending, as
that borrower is having required character for loan initiation. Other than ECIB, various
factors are taken into consideration to assess the character of the borrowing entity. These
factors include assessment of the following:

 Sponsors of the borrowing entity

 Management team of the sponsors
 Financers of borrower

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 Professionalism of the management team of sponsors
 Track record of management team during recessions and booms in business cycles
 Financial behavior of project’s owner in which the borrower is going to invest
 Business line alignment with the purpose of the loan

Customer’s character assessment is dependent upon assessment of above given factors. If

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

any customer wants to avail loan for the first time, then all above mentioned factors are
assessed other than ECIB.

Hence the character of any borrowing entity is assessed on the segregation of factors stated
above.

Capacity:

Second most important C out of 5 Cs of credit is capacity. Capacity is basically taken as;

 Ability of the borrower to execute the project

 Ability of borrower to repay the debt obligations

The concept of capacity lies in the fact that borrower should be having enough resources to
execute the project. Those resources might comprised of financial as well as human
resources. The borrowing entity, while applying for loan, must be aware of its capacity to
execute the project. Then borrowing entity should be aware of the fact that it must be
having enough money to meet its debt obligations on time. Borrower should be aware of
the productivity and profitability of the project which is helpful in analyzing future cash
flows of the project and that will ultimately help lenders to analyze the capacity of the
borrowing entity. Capacity of any borrower can be analyzed by assessing debt to income
ratio of the borrower. Lower debt to income ratio is favorable always because lower debt to
income ratio indicates that borrower is having enough capacity to repay the loan. Higher
debt to income ratio is alarming sign while lending and it indicates that borrower is with low
capacity to repay the loan amount. Hence capacity is again another very important factor
7
while analyzing credit risk of any entity. In nutshell, borrower’s ability to execute the project
and repay the loan amount is labeled as capacity of the borrower.
 Capital:

Third C of credit is termed as capital. Concept of capital revolves around the segregation of
capital in the literature. Capital is classified into two parts as stated below:

 Financial capital
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

 Human Capital
Financial capital encompasses the concept that, in any business loan, amount invested
by borrower other than debt. Actual term which represents financial capital of the
borrower is known as equity. This equity is actually a project’s total equity. Borrower
whenever applies for loan, needs for any sort of project. That project must consist of an
overall project’s equity. This project equity is actually the total amount present for the
project. Financial capital of a borrower is also taken as liquid assets of the borrower.
Anything borrower invests on its own aside from the debt amount, comes under the
umbrella of financial capital. There is a ratio called debt to equity ratio which best
describes the concept of financial capital. In debt to equity ratio, there are two
segments, debt and equity, borrower applies for a loan amount needed termed as debt
and also put his available funds in the business for which he is applying loan called
equity. Lower the debt to equity ratio, higher the chances to avail loan because equity
on higher side makes loan conditions more favorable. It is evident here that financial
capital of the borrower is assessed in credit risk assessment, which shows the financial
position and stability of the borrower. So borrower with more equity and less debt
outstanding is less risky in credit risk assessment.
Human capital is taken as the economic benefit of worker’s skills and expertise. In
addition to qualities that employers value like dedication and punctuality, human capital
encompasses assets like intelligence, education, skillset, training and health. Human
capital is basically an intangible asset to a company that can’t be taken on balance sheet
of the company. It is very important factor in analyzing the credit riskiness of the
borrower as it effects productivity as well as profitability of any entity. Investment in
human capital by any entity shows that there are chances of increasing productivity of
that entity and then becoming successful ultimately.

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 Hence financial and human capital both plays an important role while assessing credit
risk of any borrowing entity. Both forms of capital actually show the actual financial
standing of the borrowing entity.
 Collateral:

Another very important C is collateral. Collateral is taken as security to the bank in case

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

of default by the customer. Collateral is taken from the borrower, prior to disbursement
of loan, in order to safeguard lender’s interest from customer default. Collateral
indicates borrower’s willingness to repay the loan, so again an important factor while
assessing credit worthiness of the borrower. Lenders offer loan to the borrower, after
securing collateral from the borrower because without taking collateral, lender is at
higher level of risk. If the borrower is not having any sort of collateral, but borrower is in
urgent need of loan, then borrower can opt for co-signer. Co-signer is also referred to as
third party collateral as cosigner is having collateral to support the loan. Now borrower
is with more responsibility because he is liable to lender as well as co-signer. It highlights
the importance of collateral in credit risk assessment that collateral is mandatory while
availing loan. Collateral can be in the form of property, machinery, bank accounts, cash,
equipment, automobiles etc. Assets as collateral, are preferred, that are readily
available in the market and are liquid in nature. Purpose of taking collateral from the
borrower is just to secure lender’s end, in the event of default by the borrower. In case
of corporate lending specifically, collateral is not hardcore property always. Collateral in
corporate lending is usually charge created by the lenders on the company’s assets. This
charge may be created against long term and short term assets. Charge is created by
SECP (Securities and Exchange Commission of Pakistan). This charge is created by
lenders on current and fixed assets of the corporates, as collateral, in corporate lending.

Hence collateral in any form, taken from the borrower, helps in analyzing credit risk
assessment of the borrower as it safeguard’s lender interest while lending.

 Conditions: 9
 The term conditions in 5 Cs of credit refers to the economic conditions prevailing in any
country. This is very important factor to determine credit risk assessment as it signifies the
current economic conditions of the industry, in which the borrower is going to invest
funds taken from the lender. This analysis of economic conditions is very important as it
signifies the genuine need of the borrower and also it highlights the security of the lender
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

because if the industry is in recession for which borrower is asking for money, then lender
will be facing loss in terms of non-repayment by the borrower. This is that single factor of
5 Cs of credit that is uncontrollable. Assessing market conditions is very important to
safeguard lender’s interest. Usually lenders find favorable to give loans in the times of
expansion, when market is showing favorable conditions. So assessing market economic
conditions play an important role while assessing credit risk of the borrower (5 Cs of
Credit: What Banks Look for When Lending, 2022)

All 5 Cs of credit explained above serves the pillar of credit risk assessment to lenders
while lending. Every borrowing entity is assessed on above explained 5 Cs of credit before
approving their required loan amount. Corporate credit risk assessment is also done in
same manner. When corporates come for loan, they are assessed on same scale for credit
risk assessment known as 5 Cs of credit.

1.3 FACTORS AFFECTING ASSESSMENT OF CORPORATE CREDIT RISK:

There exist certain factors that affect assessment of credit risk. These factors help corporate
bankers to assess the levels of credit risk associated with the corporates while lending.

 Default Probability:

This is very important factor while assessing credit risk of corporates. The term default
probability encompasses the concept that the corporate will not honor the contractual
commitments and default on its loan obligations. Assessment of default probability varies
from entity to entity. Here corporate credit risk is under consideration, so assessment of
corporates default probability is considered here. In this specific case of corporate credit risk
assessment, the default probability of corporates is assessed through approaching credit

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rating of corporates using different tools e.g. External credit ratings, Credit report, Rating
agencies etc.

If the banker assess that any corporate is with low default probability, then banker can offer
that corporate loan with minimum down payment and interest rates. Here in this specific
scenario, credit risk is being managed through securing loan through collateral.

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

Hence if the probability to default of the corporate entity is assessed prior to actual default,
then the chances of credit risk minimize. So it is not wrong to come at the conclusion that
assessing default probability of any corporate is risk identification prior to loan approval and
then after risk assessment, risk mitigation strategies are designed accordingly. In order to
avoid upcoming corporate credit risk.

 Loss given default:

It is another important factor to assess in corporate credit risk assessment. It is basically a

continuity to default probability. The concept of loss given default revolves around the fact
that corporate default comes up with a specific amount of loss. Total loss amount resultant
of default by the corporate borrower is termed as loss given default.

If two corporate entities are taking loan from same bank and one is taking more loan
amount as compared to other then default by the corporate with greater loan amount will
take the bank in a greater loss. It is an obvious fact that defaults on greater loan amount will
take the lender to greater loss. There exists no standard practice of calculating loss given
default of any borrowing entity. All lenders takes whole loan portfolio into consideration to
assess total loss given default.

It is again a good practice to avoid future losses after loss given default identification and
designing its mitigation strategy which varies from project to project of the corporate
borrower, because probability of loss given default, if assessed on time, prior to loan
approval, will safeguard the lender’s interest.
11
 Exposure at default:
 It is the total loss amount that any lender is actually exposed to, can be at any given time, as
a result of loan defaults by the corporates. This factor of credit risk assessment is basically
an indicator of lender’s risk appetite. Exposure at default is that measure which is calculated
for every type of borrowing entity like individuals and corporates.

Exposure at default is calculated through a standard pattern. Multiplying the loan amount
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

with particular percentage adjusted on the basis of loan particulars, a figure is obtained,
known as exposure at default.

Thus measuring exposure at default, is definitely helpful in assessing credit risk of any
corporate entity (team, 2020)

2. CORPORATE LENDING PROCESS FLOW FROM CUSTOMER ONBOARDING TO LOAN

APPROVAL, COVERING RISK ASSESSMENT AND ITS MITIGATION:

Whenever any corporate approach the lender for need of loan, that corporate might be an
NTB (New to Bank) or ETB (Existing to Bank).

Lending process for NTB’s and ETB’s are same, because all below mentioned details are
required by the customer before lending.

The corporate borrower enters the bank and applies for specific loan amount based on its
need. The corporate banker follows the following procedure of seeking information from the
corporate borrower for the purpose of lending.

2.1 Company’s info:

Client is asked for detailed information about its company. Each and every information
about company’s operations, financials and projects is taken from the corporate entity
applying for loan. Basically in this very first step of the customer analysis, 5 Cs of credit
should be assessed in general, in order to assess the corporate borrower.

Character of the corporate is assessed by asking the client about its project owners,
sponsors, management team, financers of the project and ECIB (Electronic credit

12 | P a g e
 information Bureau) report of the company. Then capacity to execute the project is
assessed. Here the project referred is, for which the customer is applying loan amount.
Financial capacity of the corporate entity is assessed in financials taken from the borrower
which is discussed in further steps of customer inquiry. Workforce skillset is assessed for the
project execution, in order to avoid future risks. Hence human capital of the corporate

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

borrower is assessed in this way which is another important C of credit. Financial capital is
assessed from financial analysis of the corporate borrower which is discussed in further
steps explained in the below section of the document. Collateral of the corporate borrower
is assessed in this step of taking company’s brief information from the borrower. Then
economic conditions and project viability is discussed with the client for which loan amount
is required by the borrowing entity.

In nutshell, comprehensive information of company is taken by the corporate banker on the

basis of 5 Cs of credit, which is helpful in risk assessment of the customer.

2.2 Industry analysis of the company:

Then business unit move towards the industry analysis of the company. It is explored that
which industry the company is operating in? Like if Khaadi comes for loan from The Bank of
Punjab, then corporate banker is known of the fact that Khaadi lies under the umbrella of
textile industry. Similarly every company’s operations definitely lies in the ambit of some
specific industry. Then after knowing the industry of company, current dynamics of the
industry are analyzed by the lender. Industry is assessed in comprehensive manner that
what is the behavior of industry during recessions and booms. Is industry able to absorb
sudden economic shocks? What are the current business trends of the industry? Profitability
of the industry also counts towards industry analysis that whether the project is related to
the industry that is in loss Comprehensive industry analysis is required in order to secure the
lender’s interest so that lender’s money is not at risk. Point to consider is that industry
analysis of the company provides an insight of revenue trends and competitors market
shares. Business trends of associated industries are also needed, in order to examine the 13
riskiness of that specific industry of the corporate borrower. As Khaadi’s example is taken,
it’s a clothing brand and its operations revolves around clothes manufacturing. Clothes
 manufacturing involves a huge process comprising of many steps from manufacturing of
fabric to taking actual form of cloth. This whole process involves technical machineries for
operationalization. These machineries definitely need electricity for operationalization.
Hence textile industry is associated with electric power industry directly because without
the support of electric power industry, textile industry is definitely unable to perform its
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

operations.
Thus industry analysis of electric power industry is important, that is associated industry of
corporate borrower Khaadi. Electric power industry will be associated with textile industry,
in case of Khaadi, only if Khaadi is not having in house power plant. In this case, if electric
power industry is in loss then it will be having adverse effects on textile industry too. But if
Khaadi is having in house power plant and plant is based on solar energy for its
operationalization, then electric power industry will not be any more associated industry of
Khaadi.

Then a mandatory part of industry analysis involves assessment of company’s standing in

the relevant industry. Proceeding with Khaadi example, Khaadi’s position is assessed as
compared to its competitors in the textile industry. Competitive analysis of the corporate
borrower is important, in order to assess its position in the industry. This assessment of
company’s standing the relevant industry will safeguard lender’s interest while corporate
lending.

Hence detailed industry analysis of the borrower’s company, plays an important role in
assessing credit risk of the corporate borrower.

2.3 Financial analysis of the company:

Very important step of risk assessment in corporate lending is financial analysis of the
corporate borrower’s company.

2.3.1 Assessment of company’s recent financials:

Recent financials of the company, usually of 3 to 5 years, are examined from financial
statements of the borrower company. Financial statements analysis is very important while

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 analyzing the financial position of any company. Financial statements to be analyzed are
listed below:

 Income Statement (Profit & Loss Statement)

 Balance Sheet
 Cash flow Statement

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

These three financial statements actually present crux of the financial standing of any
company. All above mentioned financial statements are interconnected and representative
of company’s performance.

2.3.2 Income statement analysis:

o Revenue Growth:

Income statement comparison of recent years, presents recent trend of revenue growth. By
comparing the income statements of recent years, recent profitability growth or decline is
visible. Revenues of any company grow because of two reasons. One is revenue growth
because of selling more quantity; other is revenue growth because of price increase.

Revenue growth in terms of selling more quantity and revenue growth in terms of price
increase due to inflation or any other economic condition, both are favorable to any
company because ultimate outcome is profitability of the company and both the reasons of
revenue growth are positive indicator of any company’s financial position while credit risk
assessment of that corporate borrower.

o Financial cost analysis:

Then financial analysis of the borrowing company proceeds with assessment of company’s
financial cost from company’s income statement. Financial cost of any company represents
the expenses related to borrowing from the creditors. These expenses made up the financial
cost of the company. Then financial cost for a company should be less because this financial
cost is ultimately expenses and less expenses are always favorable for any company’s 15
financial standing.
 Other measures of income statement include Gross profit, all expenses, Operating profit and
Net profit. These all measures are important in financial analysis of any company.

o Gross Profit:

Gross Profit is actually profit measure of any business that is calculated by subtracting cost
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

of goods sold from the revenues.

Gross Profit = Revenue – Cost of Goods sold

o All expenses:

All expenses encompasses expenses related to selling, general and administrative side and
appear as selling, general and administrative expenses head on company’s income
statement. These expenses are subtracted from gross profit to get operating profit which is
further explained in operating profit section given below.

o Operating profit:

Operating profit is the profit of any business from the operations of that business. It is
calculated by subtracting operating expenses from the gross profit. Operating profit is also
termed as EBIT (Earnings before interest and taxes).

Operating Profit = Gross profit – Operating expenses

Operating profit can be negative as it gives the signal that company is spending maximum
amount on manufacturing of its products. And during credit risk analysis of any corporate,
negative operating profit is not red signal.

o Net Profit:

Net profit is actual amount, a company earns after all deductions of interest expenses,
operating expenses and tax expenses incurred over a specific period of time. Value of net
profit should not be negative because negative net profit clearly indicates that company
with negative net profit is in loss.

Net profit = Total Revenue – Total Expenses (of same period)

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2.3.3 Balance Sheet Analysis:

Balance sheet of any company comprises of three major sections:

 Assets

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

 Liabilities
 Owner’s equity

2.3.3.1 Asset side of Balance Sheet:

Balance sheet analysis starts with analysis of asset side of balance sheet. Assets section of
balance sheet consists of current and fixed assets sections separately. Total value of current
assets is written under the head of current assets. Current assets of any company comprises
majorly of receivables and stocks. On comparison with recent years, if current assets are
increasing with stagnant sales then this not favorable because sales should get a boost with
increase in current assets, increase in inventory without increase in sales is not favorable.
Current assets should increase with increase in current liability and sales (as per matching
principle).

Fixed assets of company usually comprises of property, plant and equipment. Recent trend
of fixed assets increase or decrease, is monitored by comparing fixed assets figures of recent
years. Increased value of fixed assets shows that company is investing on BMR (Balancing,
Modernization and Replacement) and CAPEX (Capital Expenditure). In both the cases,
company is investing at good side because investing in BMR increases production efficiency
as BMR is all about replacement of company assets for improvement. Increased investment
in CAPEX shows that company’s production capacity is increased.

Thus increased fixed assets are positive activity of any company.

17
2.3.3.2 Equity and Liability Side of Balance Sheet:
 Equity head on balance sheet comprises majorly of reserves, issued capital, subscribed and
paid up share capital. If this head is in increasing manner, means value of above mentioned
categories of equity head are increasing in any company’s balance sheet, then that
corporate is favorable for lending while assessing its credit risk by the lender.

Liability side analysis of balance sheet comprises of:

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

 Short term borrowings

 Long term borrowings
 Current maturity of long term borrowings

Short term borrowings, if appear increased, on balance sheet of any corporate, it clearly
means that company has availed working capital lines. These working capital lines, availed
by the customer, usually comprises of running finance.

Long term borrowings if increased, it means company has increased its fixed assets.
Increased investment in fixed assets means investment in CAPEX or BMR.

Usually, corporate bankers, while lending assess debt to equity ratio of the business. There
is no standard debt to equity ratio to be followed by business while applying for loan
amount. It all depends upon client analysis that is the way how lender analyzes the client
and its business. Sometimes loaning facility is provided to the client with 100% debt, keeping
in view its business flow, operational activities, profitability and previous repayment
behavior. So this ratio cannot be standardized for any business to maintain but normal
practice is to accept greater equity and less debt.

Current maturity of long term borrowings is taken as part of long term’s repayment, which
is becoming due in current FY. It is a wholesome concept which encompasses the fact that
repayment maturities of long term loans are approved at the time of approval. Repayment
maturities of long term loans are basically termed as current maturities of long term loans.
Long term loans usually are of long tenure and not payable at one specific time period that
is, at the tenure end of long term loan. So long term borrowings repayments are scheduled
at the time of approval. These repayments are current maturity of long term loans.

18 | P a g e
Like if a loan is of 10 years maturity, then its repayments are taken in chunks, like yearly
payments until the end of 10 years. These repayments comprises of principal and markup
payments.

While assessing any company’s balance sheet for risk assessment, if values of current maturities
of long term loans are in decreasing manner with every passing year, it means that company is in

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

favorable position to lend because it is fulfilling its obligations in favorable manner.

2.3.4 Cash Flow statement analysis:

Cash flow statement analysis is based on three main heads of cash flow statement of any
company:

 Cash flow from Operating activities

 Cash flow from Investing activities
 Cash flow from Financing activities

2.3.4.1 Cash flow from operating activities:

This head of cash flow statement depicts the company ability to repay its loans. It represents
the total funds generated by the company. These total funds earned by the company
represents company’s actual growth because it is the earning of any company by its
operations, which depicts its repayment capacity.

This head of cash flow statement should be positive and in increasing manner with every
passing year, because it represents the net value of cash generated from the operating
activities of the company. If this head is negative or in decreasing manner, then not a big
deal, because decreasing value of cash flow from operations does not mean that company is
in loss actually. If profit margins are not decreasing, fixed and variable costs are stagnant,
not in increasing manner, than decreasing trend of net value of operational activities is not
red signal for lender.

2.3.4.2 Cash flow from investing activities: 19

 This head of cash flow statement represents, net value of cash used in the investing
activities of any company. This investment of company can be in the form of CAPEX, can be
BMR or any investment by company.

This head of cash flow statement ideally be in decreasing manner because it represents the
outflow of company in investing activities.
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

2.3.4.3 Cash flow from financing activities:

This part of cash flow statement represents net value of cash generated from the financing
activities. This head depends upon all loans, short term and long term, obtained and repaid.
Thus, this head should also be positive because loans repayment value is subtracted from
loans obtained value and its net should be positive (Lucky Cement Annual Report 2021-
2022).

Positive value of this head demonstrates that company is in favorable position for availing
loan.

2.3.5 Financial Ratio Analysis:

While analyzing credit risk of any company, some financial ratios are very important to
analyze, as explained below:

 DSCR
 ICR
 Linkage ratio
 Current ratio
 Leverage ratio

2.3.5.1 DSCR (Debt Service Coverage Ratio):

DSCR is a ratio of operating profit to sum of current maturity of long term loans of previous
year and financial cost of current year.

DSCR = Operating profit/ Current maturity of long term loans of previous year+ Financial
cost of the current year

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Or DSCR is taken as:

DSCR = Net operating Income/Total debt service

This ratio represents the availability of company’s cash flow to fulfil its debt obligations.
DSCR basically is a measure that shows an estimate of company’s earnings to pay its debts.

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

In nutshell, DSCR is a representation of any company’s ability to pay principal and markup
repayments.

The value of DSCR should be greater than 1 because higher the operating income, higher
the company’s ability to fulfil its debt obligations.

But this threshold is not standard, it varies from client to client, like if any renowned strong
company wants to avail loan from BOP and its DSCR is not greater than 1, instead of the fact,
that company is provided with the loan, because of the company market repute and
repayment behavior.

2.3.5.2 ICR (Interest Coverage Ratio):

ICR is ratio of EBITDA (Earnings before interest, taxes, depreciation and amortization) to
Financial Cost as shown below:

ICR = EBITDA/Financial Cost

Interest coverage ratio represents the ability of a company to pay interest on its outstanding
debts. It is an accurate measure to calculate the credit riskiness of any company while
lending.

ICR should be greater than 1 because higher the operating profit, higher the chances of a
company to pay interest on its debt obligations.

Again, as mentioned above, this threshold is not standard. It varies from client to client.

2.3.5.3 Linkage ratio:

21
This financial ratio is the ratio of total bank debts to equity as shown below:
 Linkage ratio = Total Bank debts/Equity

The numerator of total bank debts represents total amount of loan including long term and
short term loans.

Linkage ratio should be less than 2 ideally but it varies from client to client.
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

2.3.5.4 Current Ratio:

It is very important financial ratio in financial analysis of any company because it represents
company’s ability to pay current liabilities out of its current assets. Current ratio is basically
ratio of current assets to current liabilities, as shown below:

Current ratio = Current Assets/ Current Liabilities

Current ratio should be greater than 1 because higher the value of current assets, higher
the probability to pay current liabilities from current assets.

This value is standard, but it varies from client to client.

2.3.5.5 Leverage ratio:

This financial ratio called leverage ratio, is used to assess the ability of any business to meet
its financial obligations. Leverage ratio is also called debt to equity ratio and is calculated as
follow:

Leverage ratio = Total debt / Total equity

Leverage ratio should be less than 1 ideally because more equity equips the company to
fulfil its financial obligations.

Less than 1 leverage ratio is ideal, but it varies from client to client.

2.3.6 Company’s Financial Projections:

Lenders require financial projections of any company if the borrower company has applied
for long term loans because long term loans require a comprehensive financial plan and

22 | P a g e
hence financial projections are best representation of corporate borrower financial plan.
Financial projections of any company enables the lender to predict the actual growth and
prospect of the business. These business predictions are one of the best tools to identify
credit risk of the business as these projections serves as snapshot of borrower’s business
plan. By the help of these financial projections, corporate banker assess the financial needs

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

of the borrower and then lends accordingly. Projections also help banks to judge company’s
ability to meet its financial obligations through their future internal cash flow generation etc.
So financial projections helps to assess credit risk at earlier stages.

Financial projections holds a great significance while assessing the repayment capacity of
any business and for this purpose sensitivity analysis is used. With the help of financial
projections, lender does sensitivity analysis and thus does credit risk assessment.

But here very important concern is that financial projections hold for existing businesses and
for existing projects. Continuation of existing projects is best depicted through financial
projections. What if a borrower wants to avail loan for the first time? Financial projections
are mandatory even for borrowers availing loan for the first time or to run startups as
entrepreneurs, both cases require startup financial projections that how they will be going
to proceed any startup or any project.

Exception holds for the projects for less than a year and short term borrowings. In this
specific case financial projections are not needed because financial projections are for long
term projects usually for more than a year.

2.3.7 ECIB report (Electronic Credit Information Bureau):

ECIB represents borrower’s history and it is again an effective tool to assess credit
worthiness of the corporate borrower. A comprehensive detail of ECIB is written above in
5Cs of credit section.

2.3.8 External Risk Rating:

23
Another very important tool to assess credit riskiness of any company is external risk rating.
This rating is done by external rating agencies like PACRA, VIS etc.
 2.4 Peer Analysis:

Peer analysis is referred to as company analysis. Businesses under same industry, are
compared, that what are the factors that differentiates the borrower company from its
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

peers of same industry. Borrower company is assessed by comparing it with its competitors.
Company’s positive and negative aspects are assessed by peer analysis. It is observed that
why the borrower company is lacking in the aspects where competitor is exceling or vice
versa and this is the best assessment of credit riskiness of the corporate borrower.

2.5 Risk Rating Models:

Risk Rating is actually very important tool to assess credit risk of any borrower. There are
two models to assess risk rating of any borrower that are as follow:

 Obligor Risk Rating

 Facility Risk Rating

2.5.1 Obligor Risk Rating:

The ORR model was created to evaluate and assess the risk of corporate entities,
commercial entities, financial and non-financial institutions. Obligor risk rating shows the
credit worthiness of the corporate borrower.

2.5.2 Facility Risk Rating:

A realistic model for assessing, measuring and rating the loss is provided by the FRR model.
This model of risk rating gives two dimensional rating. This two dimensional rating is based
on two factors that are parameters of requested facility and assessment of collateral
established by the financial institutions (BenchMatrix, n.d.).

3. CASE STUDY (PRACTICAL EXAMPLE OF CORPORATE CREDIT RISK ASSESSMENT AND ITS
MITIGATION:

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Company: XYZ

Group Name: ABC

Business Line: Cement Manufacturing

Business Segment: Corporate

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

Primary Industry: Cement Manufacturing

Existing Proposed

Risk Rating 3 (Risk) 1 (on the basis of system based

audited financials due to change in
industry dynamics)

Group Risk Rating 4 (Risk) 2 (on the basis of system based

audited financials due to change in
industry dynamics)

Annual Renewals and extensions in already availed facilities are required as mentioned
below:

Company XYZ is existing customer of bank and wants to expand its business and hence
needs expansions in already availed facilities.

Client’s existing exposure is of 3 billion and wants to avail facility for a new project, thus
wants to take its exposure to 4 billion.

There is always a two way process in lending. Business forwards lending proposal to Risk and
then risk approves or rejects with certain conditions. Like in this specific case study, business
side is corporate sector, which forwards the proposal to risk side. Whenever any proposal is
forwarded from business to risk, risk investigates and explores each and every mentioned
fact in detail.
25
 The proposed topic of this report is corporate credit risk assessment and its mitigation. A
case study of a corporate client is taken here for better understanding of the proposed
topic. The basic information related to corporate client is given above.

Company XYZ is existing client of Bank of Punjab and currently availing various facilities from
BOP under the umbrella of corporate lending.
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

Considering the Credit Approval Package, Credit Memorandum, Basic Information Report,
Risk Management Group due diligence and various documents of the proposal, following
information has been selected to explain the credit risk assessment of company XYZ, also
credit risk mitigation way outs are discussed below.

Based on the comprehensive corporate lending process covering risk assessment tools
mentioned above, below is given a practical example of how banks do credit risk assessment
for corporates and devise mitigation strategies.

3.1 Financial Analysis of Company XYZ:

Financial statements of Company XYZ, are audited by auditors of renowned audit firms, for
the year ended June 2021.

3.1.1 Balance Sheet and Income Statement Analysis:

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 A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION
3.1.1.1 Balance sheet analysis:

In the above given balance sheet of Company XYZ, it is clearly evident that total fixed assets
are increasing from 2020 to 2021, which means company is investing in its fixed assets and it
shows company’s good financial position. Then increased value of current assets is justified
with increased sales which means company’s current assets are not becoming an extra cost
to it, instead it is giving benefit to the company, in the form of increased sales.

Decreased current and long term liabilities is also a favorable signal to the lender that
company is paying off all the current and long term liabilities timely and having good
repayment capacity. 27
 Increasing amount of stock is also green signal while lending that company has good
financial standing.

3.1.1.2 Income Statement analysis:

Sales increased from FY20 to FY21 and then EBITDA (Earnings before interest, tax,
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

depreciation and amortization) value also increased from 2020 to 2021. Both measures gave
glimpse of favorable financial position.

Decrease in Financial cost and increase in Net profit of company demonstrates favorable
financial position of the company.

3.1.1.3 Financial Ratio analysis:

 Current ratio:

Value of current ratio is greater than 1 in all years and in increasing trend shows that
company is paying of all current liabilities through its current assets.

 Linkage ratio:

Values of leverage ratio, throughout each year, less than 2, demonstrates again company is
fulfilling its financial obligations in favorable manner as total amount of loan from all banks
is not exceeding total equity of the borrower.

 Leverage ratio:

This value of leverage ratio should be less than 1, and company’s leverage ratio trends is in
same manner as every year is with decreasing value of leverage ratio which is less than 1
and is again a favorable financial position for lending.

 ICR:

Interest coverage ratio of the company, as given above, was negative in 2020 and then
increased from 1 in 2022 which is again a favorable financial standing of company.

 DSCR:

28 | P a g e
Debt service coverage ratio of company is greater than 1 in every year, so company has
favorable DSCR.

Thus balance sheet and income statement analysis is a tool for assessing credit risk
assessment and in this case of Company, all values of income statement and balance sheet
are favorable for lending because financial position of company is favorable for availing

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

facilities from the Bank of Punjab.

3.1.2 Cash Flow analysis:

In the above given, cash flow statement, value of operating cash flows without workig
capital changes is 9013 in FY21 and then after fulfilling working capital requirements from
this cash flow, company left with 7,408 Mn and then after investing in investing activities
like CAPEX, company is left with 251 Mn. Then company paid outstanding debt and got
negative cash flow of 6733 Mn. But at the end of year company had poistive net cash.

So company’s cash flows give an idea of good financial standing as it managed to maintain
its financial position through its cash flows management.

29
3.1.3 Financial Projections:
 On the basis of following assumptions, client has designed its financial projections
mentioned in the table given below:

 Client is prospecting an increase in gross capacity of plant.

 Client has anticipated to maintain capacity utilization of 75-85% which is in line with
their historical record and anticipated market trend.
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

 Plant will operate for 300 days annually.

 Client has assumed average sales growth at 14.00 % for year 2021-22 and 31.50%
increase for 2022-23.
 Assuming commercial operational date of New 6,000 Tons Per Day line, Increase in
sales from that point onwards have been assumed at 3 % growth annually on average.

Client has assumed following financial projections on the basis of above assumptions:

30 | P a g e
 A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

Above given table depicts the financial projections of Company. Client is assuming to boost
up sales and then also prospecting increase in EBITDA and then afterwards giving a clear
idea to have increase in net profit, which are all good expected prospects for Company.

In the Balance sheet projections, company is expecting to enhance its equity and lessen its 31
debt and both situations are favorable for company. Financial ratios future trend is also
giving good financial prospects.
 Hence Balance Sheet analysis and Income statement analysis, Financial ratio analysis and cash
flow statement analysis, all in nutshell, gave idea that company is not risky business to lend and
will fulfill its debt obligations based on the financial analysis of the company.

3.1.4 Sensitivity Anslysis:

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

Usually it is a practice of Relationship Managers to perform sensitivty analysis. Sensitivty analysis

is one of the best tool for assessing credit risk. It provides an insight to the mangers about
company’s future performance because changes in dependent variables like sales, variable costs,
EBITDA etc, demonstartes major fluctuations in independent varibales like net profit of the
company. Relationship managers always strive to reduce risk and expect increase in comapny’s
performance, that’s why they do sensitivity analysis to estimate comapny performance by
applying expected changings in the dependent variables and observing the outcome varibale
accordingly. It gives an idea about company’s financial standing in future years and most
importantly sensitivity analysis is the best indicator of risk level of any company. One of the
technqiue to do sensitivity analysis is to decrease EBITDA by a certain percentage, in order to get
idea about the business dynamics of future as EBITDA is the major financial figure which gives an
idea about business cash flows accurately. Change in EBITDA will definitely cause change in net
profit and net profit is actual financial figure of a company’s performance.

Hence sensitivity analysis is the most effective tool of assessing company’s risk.

3.2 Industry Analysis:

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 A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION
As Company’s industry is cement industry, then its analysis is of prior importance while
lending. As evident from above graph, that sales of cement industry are increasing every
year. There came a minor decline in sales during 2020 which was covered up during 2021
boom in cement industry. Then profit after taxation is also increasing, got decline in 2019
but then increased again which shows that cement industry is with good fiancial standing.
EBITDA trend is also seeming to be favorable.

It is analyzed from the cement industry graph that this industry is in favorable financial
position to lend. Thus industry analysis of cement industry demonstrates that the proposed
industry is nit risky to lend. Hence industry analysis is another tool for credit risk assessment.

3.3 CIB Reporting:

Fund Based 18,342,197,957

33
 Non Fund Based 13,528,370,897

Amount under litigation 0

Write-off during last 15 years 0

Past dues 90 days (Overdues) 0

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

Past dues 365 days (Overdues) 0

Date & Amount of Recovery 0

No of time RR during last 5 years 0

The reporting by Credit Information Bureau is again an important tool to assess the credit
riskiness of a company. Above table show that Company has no amount under litigation, no
write off during last five years, no quarterly or annually overdues, no involvement in RR
(Rescheduling\Restructuring) for last 5 years.

All above information given by CIB demonstrates that company is a company with good
credit history. So again credit risk assessment of company is observed through CIB reporting.

3.4 Internal Credit Risk Rating:

As the name implies that internal credit risk rating is very important tool to assess credit
riskiness of any company. It comprises of two sections mentioned below:

 Quantitaive section
 Qualitative section

Financial highlights part is termed as quantitative section of internal risk rating and
qualitative risk factors presents qualitative section of internal risk rating.

Internal credit risk rating is the internal document of the bank which is not available to all
public. Hence on the basis of financial analysis of the company, it can be assessed easily that

34 | P a g e
company’s quantitative section of internal credit risk rating is demonstrating that company
is not riskier to lend.

Qualitative factors of internal risk rating includes:

 Assessment of credit enhancement

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

 Company’s ECIB
 Relationship with the bank
 Quality of financial reporting
 Ownership structure
 Account behavior
 Years of relevant management experience
 Internal quality
 Years in business

On the basis of above factors assessment, qualtitiave assessment in CIB reporting is done. As
per the detailed company analysis given above, the company is not riskier to lend.

In nutshell, both financial highlights of company and qualitative risk factors indicates that
company is not at all riskier to lend as it is maintain its financial position and financial
standing to be a good competitor in the cement industry.

3.5 Group Risk Rating:

The risk rating of group presents the overall rating of company’s group, including its sister
concerns. All the ratings given below of the borrower’s whole group are acceptable as they
lie in acceptable level of risk rating that is from 1 to 4.

As mentioned in the start of the case study, group risk rating is revised from 4 to 2, which is
favorable rating in lending.

Hence company’s group risk rating is also favorable for it to avail the facilities from the Bank
35
of Punjab.

3.6 Facility Risk Rating:

 The risk rating of facility provided to the borrower company, is actually rating of the facilities
to be provided to the customer. The risk assessment of facility provided and then security
against the facility are assessed and then risk rating is given accordingly.

3.7 RMG recommendations (covering risk assessment and mitigation):

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

Risk management group gives recommendations on the basis of their observations of the
case. RMG tries to minimize the risk in every way possible, in order to safeguard bank’s
interest. RMG investigates the whole case and then recommends about each case. These
RMG recommendations encompasses risks assessed and then their mitigants also. This part
is confidential section of the bank and is not disclosed to anyone except the bank concerns.

3.9 Business Recommndations:

Whenever business send the case to risk for approval, it mentions recommendations that
encompasses case details and clauses supporting case from the business. Business
recommends the case to the risk based on the client’s strength and project features.

4. Risk analysis process flow:

Business team takes up any case of lending from the borrower, like in this specific topic of
the report, corporate is under consideration, then CIBG group takes up the case,
Relationship manager initiates the case and then after fulfilling all the requirements of
documentation and other signing formalities from the heads, RM completes the case and it
is forwarded to Risk Management Group. Risk team checks the whole case with going into
extensive details and measures risk of the borrower with all the risk assessment tools again
and if finds any risk, return the case to the business with objections. If the case is approved
from Risk, then it is forwarded to credit approval committee headed by CRO (Chief Risk
Officer) for further approval, if approved at this stage, then case is forwarded to the Bank
CEO for approval. When approved from the CEO of BOP, then it comes in the bucket of
business again. Then business, in this case, corporate department forwards the case to CAD
(Credit administration department) and then CAD involve legal team with it for the collateral
analysis against the facilities provided. If CAD gets satisfied with all its risk assessments, then

36 | P a g e
CAD issues DAC (Disbursement Authorization Certificate) and forwards it to the business.
Then DAC is forwarded from business unit to credit operations for the disbursement of loan.

In this way, all the risk assessment procedure is completed from taking customer onboard to
loan disbursement.

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

5. Significance of credit risk analysis

Assessment of credit risk holds great importance in lending process of banks. Credit risk
analysis is basically a process encompassing quantification of credit risk that a borrower
provides to the lender. Credit analyst often conducts credit risk assessment on the potential
borrowers to analyze their repayment capacity of debt amounts. The ultimate aim of
conducting credit risk assessment is to assess the credit worthiness of the borrower and
ability to fulfill the debt obligations. Credit risk revolves around the concept of default.
Probability of default leads to the existence of credit risk. Credit risk analysis help the
lenders to safeguard themselves from severe losses which occur in case of borrower’s
default. Lenders charge high interest rates from the borrowers at higher levels of credit risk,
thus saving themselves from high default risk (team, 2020).

Credit risk analysis is of prior importance for any lending institution because the survival,
expansion and profitability of any lending institution depends upon credit risk assessment
and management (Idowu Abiola, Awoyemi Samuel Olausi, 2014).

Risk analysis and its mitigation are broadly taken as risk management and risk management
is pillar of an organization’s success.

6. Conclusion:

Credit risk is risk of borrower’s default on the debt obligations. It is also taken as assessment
of borrower’s creditworthiness. Assessment of credit risk basically encompasses the
estimation of likelihood of loss due to borrower’s inability to pay back loan amount. Credit 37
risk assessment in terms of corporates is the credit risk assessment of corporate clients.
 Credit risk is classified in three different types in terms of business transactions that are
direct, indirect and counterparty risk. Credit risk is assessed through default probability, loss
given default and exposure at default, as they all are probabilities of default helpful in
assessing credit risk of any borrower. Various tools are discussed in report to assess the
corporate credit risk. Major tools are financial analysis, industry analysis, risk rating models,
A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

CIB reporting, sensitivity analysis etc. Comprehensive risk analysis of a specific BOP client is
explained in the report using various risk assessment tools and then risk mitigation is also
discussed. Credit risk assessment is very important step in lending and then mitigation of
assessed risks is also equally important in order to safeguard bank’s interest.

38 | P a g e
References

(2022). Retrieved from MathWorks:

https://www.mathworks.com/help/risk/corporate-credit-

A REVIEW ON CORPORATE CREDIT RISK ASSESSMENT AND ITS MITIGATION

risk.html#:~:text=Simulate%20default%20credit%20risk%2C%20given,default
s%20using%20the%20creditDefaultCopula%20object.

5 Cs of Credit: What Banks Look for When Lending. (2022, May 5). Retrieved from
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cs-of-credit

BenchMatrix. (n.d.). Risk Rating Models. Retrieved from BenchMatrix:

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Corporate Credit Risk. (2022). Retrieved from MathWorks:

https://www.mathworks.com/help/risk/corporate-credit-
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s%20using%20the%20creditDefaultCopula%20object.

Credit risk. (n.d.). Retrieved from Wikipedia:

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Credit Score vs Credit Risk Assessment: What’s The Difference? (2022, feb 23).
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 Idowu Abiola, Awoyemi Samuel Olausi. (2014). The Impact of Credit Risk
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Punjab, B. o. (2022). Credit Policy Manual. Credit Policy Manual. Pakistan: Bank of
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Punjab .

team, C. (2020, March 09). Purpose of Credit Risk Analysis. Retrieved from Corporate
finance institute:
https://corporatefinanceinstitute.com/resources/knowledge/credit/purpose-
of-credit-risk-analysis/

team, C. (2020, March 09). Purpose of Credit Risk Analysis. Retrieved from Corporate
finance institute:
https://corporatefinanceinstitute.com/resources/knowledge/credit/purpose-
of-credit-risk-analysis/

Wallstreetmojo Editorial Team, Dheeraj Vaidya , CFA, FRM. (n.d.). Credit Risk. Credit
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