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Types of Errorsy Type I error

y Type II error

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Traditional Credit Analysisy Character

y Capacity

y Capitaly Collateral

y Conditions

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Strong Week

StrongWeek

Capacity

Capital

Strong

Capital

Week

Doughtful Risk

Week

Dangerous

Risk

WeekStrong

Should Credit

be Granted?

Character

Capacity

Capital

Strong

Capital

Week

Excellent risk

Strong

Fair risk

Strong

How much

credit should

be granted?

Week

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Numerical Credit Scoringy Identifyfactors relevantfor credit evaluation.

yAssign weightto these factors that reflectthere

relative importance.y Rate the customer on various factors, usinga suitable

rating scale.

y For eachfactor, multiplythe factor rating withthefactor weightto getfactor score.

yAdd allthe factor scores to get overallcustomer ratingindex.

y Based on the ratingindex, classifythe customer.

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Credit Rating Index

Factor Factor

weight

Rating Factor Score

5 4 3 2 1

Past payment 0.30 1.20

Net profit

margin

0.20 0.80

Current Ratio 0.20 0.60

Debt-equity

ratio

0.10 0.40

Return on

equity

0.20 1.00

Rating index 4.00

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Discriminant Analysis

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Risk Classification SchemeRisk Class Description

1 Customer with no risk ofdefault

2 Customer with negligible risk ofdefault

3 Customer withlittle risk ofdefault

4 Customer with some risk ofdefault

5 Customers with significant risk ofdefault

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Controls of Accounts Receivables

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Days Sales Outstandingy The days sales outstanding at a given time t maybe

defined as the ratio of accounts receivable outstanding

at that time to average daily sales figure during thepreceding 30 days, 60 days, 90days or some otherrelevant period.

Accounts receivables at time t

y DSOt = --------------------------------------

Average daily sales

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Sales and Receivables Data

Month Sales Receivables Month Sales Receivables

January 150 400 July 190 340

February 156 360 August 200 350

March 158 320 September 200 350

April 190 310 October 220 380

May 170 300 November 230 400

June 180 320 December 240 420

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Ageing ScheduleAge Group (in days) Percent of Receivables

0-30 35

31-60 40

61-90 20

More than 90 5

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Collection Matrix

Percentage of Receivables

Collected During the

January

Sales

February

Sales

March

Sales

April

Sales

May

Sales

June

Sales

Month of sales 13 14 15 12 10 9

First following month 42 35 40 40 36 35

Second following month 33 40 21 24 26 26

Third following month 12 11 24 19 24 25

Fourth following month - - - 5 4 5