CHAPTER 6 – ANALYSIS OF BANKS’ CREDIT RISK

ASSESSMENT PROCEDURES

Comparison of Credit Risk Management and Assessment Structures is the central

theme of the study. To examine the existing credit appraisal and assessment
mechanisms followed by Indian Banks in providing finances, data has been collected
from three different sectors of the Indian Banking industry (namely public, private
and foreign). The data is analysed on various subsets of credit risk assessment system
such as credit appraisal method, credit rating systems applied, credit scoring etc. In
order to obtain the range of grades and risk associated with each grade in assessing a
loan application has been conducted. The major issue is to examine whether the
lending and assessment practices differ across banking sectors. Thus, the results have
been analysed trough descriptive analysis in first instance in this chapter and using
behavioural aspects in next chapters. This chapter shows that the various subsets of
credit risk assessment system differ across banks and thus, the range of grades and
risk associated also vary. This probably implies that lending decisions to a particular
borrower at the same time is different across banks.

6.1 Analysis of Credit Appraisal Procedures

6.1.1 The Respondent Classifiers

The respondent classifiers used in the study are (a) Type of Bank, (b) Age group, (c)
Educational Background, (d) Credit experience, (e) Employee’s Position and (f)
Overall Banking experience. Exhibit 6A shows the profile of the respondents on these
classification parameters.

Exhibit 6A - Respondents’ Profile

Type of Bank
Sectors Responses Response Percentage
Public Sector Banks 125 45.45
Private Sector Banks 100 36.36
Foreign Banks 50 18.18
Age Group in banking industry
Age Group Responses Response Percentage
20-30 79 28.83
31-40 140 51.09
 41-50 44 16.06
51-60 8 2.92
61 and above 3 1.09
Experience in the field of Credit Assessment
Credit Experience Responses Response Percentage
Less than 2 years 15 5.45
2-5 years 60 21.82
5-8 years 139 50.55
More than 8 years 61 22.18
Overall banking experience
Total Bank Experience Responses Response Percentage
Less than 5 years 46 16.73
5-10 years 112 40.73
10-20 years 84 30.55
More than 20 years 33 12.00
Qualification
Qualification Responses Response Percentage
Graduation 12 4.46
Post-Graduation 116 43.12
Diploma/Certificate in 6 2.23
banking
MBA 50 18.59
CA 85 31.60
Position
Employee’s Position Responses Response Percentage
Junior Level 66 24.00
Middle Level 169 61.54
Senior Level 40 14.55
Total 275

Senior level employees were quite reluctant on providing credit information and
junior level was given less importance by the researcher due to lack of expertize of
these level employees. It is experienced that people with better qualification and good
experience will be in a better position to provide information related to the credit field,
since the field of credit is very vast, dynamic and risky.

6.1.2 Loan Granting Mechanism/Process

6.1.2.1 Assessment Period

Average Assessment time for Short Term Loans

Exhibit 6B shows that average assessment time for short-term loans takes 5-10 days
covering 21.82% responses. However, in some cases it may go up to 2-3 months
covering 6.18% responses.

Exhibit 6B - Average Assessment time for Short Term Loans

Across sectors it is observed that average assessment time for short-term loans varies
among banks even in the same sector (Appendix 1). For foreign banks the majority is
towards larger time taken in the assessment process. However in the public sector
and private sector banks the variation in the duration of processing a short-term loan
is very high. This reveals that across sectors and various banks in the same sector are
also taking different average time to assess a short-term loan.

Average Assessment time for Long Term Loans

Exhibit 6C - Average Assessment time for Long Term Loans

Exhibit 6C, shows that the various banks are taking different assessment time while
granting long-term loan facilities as well. The majority of the survey respondents fall
towards 25-30 days (23.27%), 1-2 months (26.18%) and 2-3 months with 11.27%.
But, other durations for the assessment of long-term loans are also getting
considerable responses which are 5-7 days (8%), 7-10 days and 15-20 days with
5.82%, 10-15 days having 5.45% share, 20-25 days with 7.64% and 3-4 months with
6.55%.

Across sectors it is observed that average assessment time for long-term loans also
varies among banks even in the same sector. The same sector is depicting the varying
average assessment times taken by the respondent bankers (Appendix 2). On the basis
of these responses it can be inferred that there is extreme variation on the grounds of
duration taken to assess various loan applications.

Assessment Duration and Customer Preferences

Results indicate that majorly the customer of one bank does consider other banks if
the loan assessment duration is longer, 89% of the respondents replied in affirmation.
But the across various sectors of banks the consideration is little different, private
sector customers directly consider other competitors as yet the public sector has little
variation that there customers sometimes do not consider other competitors the reason
for this that they usually expect longer duration or probably public sector banks
charges are a bit lower than the private sector (Appendix 3).

Exhibit 6I - Assessment Duration and Customer Preferences

Response Responses

Affirmative 89%

Negative 11%

Longer Assessment Duration and Customer Shift

Further exhibit 6E, shows that in case of longer duration taken up by the bank in loan
assessments the borrowers of foreign banks the give major consideration to private
sector banks whereas in case of public sector banks the customers usually moves
towards the other banks in the same sector.
 Exhibit 6E - Longer Assessment Duration and Customer Shift

However in case some of the bankers belonging to public sectors there is a shift in
customers’ consideration to both public as well as private sector banks. But, in case of
private banks either the customer retains in the same sector but moving to other banks
or they sometimes consider both of them simultaneously (Appendix 4).

6.1.2.2 Collateral Required and Loan Categories

Collateral is when a borrower pledges an asset in exchange of loan provided. Lenders

take pledge of borrowers existing assets as security for providing the money in the
form of loan. While accepting these securities of landed property or any other asset,
the banking sector needs a professional valuation report that is signed by a recognized
firm of ‘valuers’. In this part of the questionnaire, bank employees were asked to
provide opinion on the type of collateral bank requires ensuring the proper recovery
of the loan.

Exhibit 6F, reveals that majority of banks requires term loans to be backed by all
three forms of collateral (mortgage, hypothecation and personal guarantee), as yet a
good amount of respondents were in favour of only mortgage or personal guarantee as
collateral in case of term loans. However, for working capital loans hypothecation is
the prime security. Whereas for non-fund based limits, mortgage and hypothecation
are important forms of collaterals. A further analysis has been carried out to examine
the trends on sector wise basis.
 Exhibit 6F - Sector wise responses on nature of collateral asked

Collateral Type Term Loan Working Capital Non Fund Based

Loan Loan

Public Sector Banks(125)

Mortgage 100% 100% 100%

Hypothecation 76.8% 76.8% 58.4%

Personal Guarantee 99.2% 77.6% 67.2%

Private Sector Banks(100)

Mortgage 100% 67% 67%

Hypothecation 60% 99% 88%

Personal Guarantee 97% 82% 84%

Foreign Banks(50)

Mortgage 100% 100% 100%

Hypothecation 100% 80% 80%

Personal Guarantee 80% 60% 60%

The mortgage is the prime security for term-loans extended to public sector banks,
followed by hypothecation and personal guarantees. However, in some banks of
public sector hypothecation as collateral has been given less weightage. Similar is the
situation of the private banks in case of term-loans mortgage of landed property and
personal guarantees have prime importance but the hypothecation is even getting
lower weightage by this sector of banking as compared to public sector. Yet, the
situation is quite different in case term loans of foreign banks. There procedure
requires mortgage and hypothecation to the higher side and personal guarantees to the
lower side.

It can be seen that for working capital loans assessment in private sector and foreign
banks mortgage has an extreme importance in the form of security, with lesser
importance of hypothecation and personal guarantee. But, in case of private banks
hypothecation of assets is more important as collateral, followed by personal
guarantee and then mortgage for some. Whereas, in non-fund based loans mortgage is
prime important collateral for public sector and foreign banks. And for private sector
banks the hypothecation is the prime security raised for non-fund based loans.
6.1.2.3 External Credit Reference Agencies

Lending institutions these days back up their loan applications by support interface
with internal as well as external databases or credit reference agencies. Out of the
various agencies which all are being considered important by different banking
sectors.

Exhibit 6G - Responses for External Credit Reference agencies

Exhibit 6H - Sector wise responses for External Credit Reference agencies

Bank CIBIL CRILC CDL MCA- ECGC DGFT NPA All of

Type ROC them

Foreign 0% 0% 0% 0% 0% 0% 0% 100%

Public 23.3% 23.3% 23.3% 24% 16.8% 8% 23.2% 76.8%

Private 61% 61% 59% 50% 42% 0% 31% 39%

As per the question of using external databases and credit reference agencies’ the
sector wise responses are monitored to have acute variation in practices being
followed across banks. For private banks, major support interfaces are CIBIL checks,
CRILC special mention accounts, RBI’s Credit Defaulters List, Ministry of Corporate
Affairs – Registrar of Companies Search with more than 50% responses in their
favour. Although, ECGC List and NPA are getting some support but some of the
private bankers do consider all these in assessments.
But, the majority of the public sector bankers have the opinion that all these external
references are being considered in credit assessments in their organizations. Also for
foreign banks absolute majority is in favour of taking support of all the external
referencing agencies. Thus, on this aspect of credit assessment, bankers exhibit
different views across sectors and within the same sector as well.

6.1.2.4 Steps in Credit Appraisal Process

When a credit proposal is received every banks credit assessment team follows certain
steps in appraising such case. This is the necessary procedure to assess the
creditability and on the basis of this the sanctioning amounts are usually decided.

From the responses it is evident that in all the foreign banks all the specified appraisal
steps are being taken while assessing a credit proposal (Appendix 5). However, in
case of public sector banks all the steps are been followed except for some banks (8%
responses), which do not prepare CMA (credit monitoring arrangement). And in
private banks, all the steps are getting a response of 52% with rest 48% respondents
do not consider monthly, quarterly, half-yearly reports. Thus, the appraisal steps
followed in assessing a loan application also vary across banks, and it varies across
banks in the same sector as well.

6.1.2.5 Reasons for Probable Credit Risk and Loan Rejection

When a loan application is rejected what are the perceived reasons for the probable
credit risk. It identifies the level of importance being given to each reason for loan
application rejection. This also helps in identifying the banking sector wise
importance being given to various factors for loan rejection.

Exhibit 6I - Reasons for Probable Credit Risk and their weightage in Loan
Rejection

Reasons Bank’s Not Somewhat Neutral Somewhat Very

Sector Probable Probable Probable Probable
Cash flow Public - - - - 123
Private - - 1 1 98
Foreign - - - 19 31
Insufficient Public - 16 2 46 60
Collateral Private - 1 19 21 59
Foreign - - - 1 49
Debt Load Public - 11 90 6 18
Private 50 30 - 2 18
Foreign 9 1 10 10 20
Company Public 10 44 38 16 17
Size Private 45 39 13 - 3
Foreign - 19 1 - 30
Due Public - - - 16 109
Diligence Private - 13 1 - 86
Foreign - - - - 50
Personal Public - 10 18 48 49
Guarantee Private - - 12 43 45
Foreign - - - 10 40
Operating Public 1 75 48 - 1
history Private 30 43 23 3 1
Foreign - 20 10 - 20
Incompetent Public - 16 22 69 18
management Private - - 80 1 19
Foreign - 10 10 17 13
Economic Public - - - 4 121
Concerns Private - - - 12 88
Foreign - - - 15 35
Market Public - - - 2 122
Reference Private - 30 1 4 65
Foreign - - - - 50
Site visit Public - - - - 124
Private - - 11 24 65
Foreign - - - - 50

For foreign banks the probable reasons for credit risk are quality of cash flow,
insufficient collateral, due diligence, personal guarantee, economic concerns, market
references and site visit. Other reasons for loan rejection have lesser impact on bank’s
credit risk. In case of public sector banks the loan rejecting aspects are quality of cash
flow, due diligence, incompetent management, economic concerns, market references
and site visit. But, majority of the public sector bankers are neutral in case of existing
debt load of the borrower.
However, for private banks quality of cash flows, insufficient collateral, due diligence,
personal guarantee, economic concerns, market references and site visit are the
rejecting factors. But for incompetent management, the majority of this sector banks
are neutral. As yet existing debt load, borrowers’ company size, insufficient operating
history are not the probable factors for this sector banks’ credit risk. Thus, it is evident
that varying importance given to different factors of loan rejection differs across
various sectors of banks.

6.1.3 Credit Risk Assessment System

6.1.3.1 BASEL Awareness

A set of agreements by the BASEL committee on Bank Supervision (BCBS),

provides recommendations on banking regulations in regards to various forms of
risks’. The main purpose of the accords is to ensure that financial institutions have
enough capital to meet its obligations and absorb all the unexpected losses that may
arise. The respondents from banks were asked to understand the awareness of BASEL
accord. The below table comprises the responses on BASEL awareness in the bankers.

On the terms of awareness of BASEL II and III capital accord, all the respondents
from all the sectors were aware of it and its applications in the banking industry.
There is no variation on this aspect in the banking sector (Appendix 6).

6.1.3.2 Credit Grant impacts banks’ risk level

“Monitoring, and other appropriate steps, are necessary to control or mitigate the risk
of connected lending when it goes to companies or individuals” (BASEL, 1999).
Banks major role is to generate money by investing funds in various aspects. One
such investment avenue for a bank is providing credit to various borrowers and
charging interest thereof. When a bank sanctions funds to a borrower this impacts the
level of risk of the bank. Further this is the aspect on which the information is
gathered from the study population (Appendix 7).

In order to provide loans to its customers, banks level of risk increases is the response
provided by all the respondents irrespective of the bank and sector they belongs to.
Thus, it means that by granting credit to the customers banks are increasing their level
of risk. And there exists uniformity on these grounds across banks.
6.1.3.3 Types of Risk in Bank Lending

The core business of banks is to attract funds and to provide it to the spheres where
they are needed. Respondents in various credit divisions of banks under study were
asked that in lending activity which type of risk primarily arise from banks point of
view. From the Exhibit 6J can be observed that the major risk encountered by banks
while lending is credit risk leading to other types of risks.

Exhibit 6J - Types of Risk in Bank Lending

“As far as the type of risk is concerned when a bank provide funds to the borrower,
there are many potential sources of risk, including liquidity risk, credit risk, interest
rate risk, market risk, foreign exchange risk and political risks” (Campbell, 2007).
This study finds major responses were towards all and some of the type of risks
covering credit risk, operational risk, market risk and default risk.

Further exploration reveals that all the foreign banks are in favour of all or some of
the types of risks. Although, the public sector banks are majorly towards all of the
types of risks but a good responses (31.2%) are towards credit risk is the only risk
when a bank lends funds and around 13% responses are stating about the credit as
well as default risk. Whereas, the private banks have majorly encountered credit risk,
in fact the 34% responses were mentioning the encounter of all the types of risk by
banks in lending practices. However, 7% responses mention the credit and default
both the risk and 1% towards credit, default and market risk (Appendix 8). A
dichotomy of opinion is observed across banks, which is not in line with findings of
Gray, et al., (1997), “credit risk is the biggest risk faced by banks and financial
intermediaries.”
6.1.3.4 Credit Risk and Probability of Default

Probability of default by the loan applicant, the bank may encounter increase in its
credit risk level. Respondents were asked whether there is any relationship between
the default probability and the level of credit risk of the bank (Appendix 9).

From the data (Appendix 9), it is evident that all the respondents except one from a
foreign bank had agreed that the level of credit risk in a bank increases with the
default probability of the loan applicants. Thus, on this ground all the respondents
have same opinion, which reflects no variation on these grounds.

6.1.3.5 Fraud Checks of the Borrowers

“The banks very frequently suffer from poor lending practice” (Koford & Tschoegl,
1999). In general, at the time of sanction of the loan applications the banks usually
perform various checking and provide funds to the applicants. But after the funds
have been provided no or very minimal monitoring is been done. The study examined
the extent of monitoring and follow-up by the banks to ensure proper credit controls.
These monitoring and follow-ups involves regular inspection and enforcement of
recovery along with other aspects by the lending institution. This is to ensure funds
obtained have been used for the intended purpose and subsequently repaid.

In this regard the respondents were asked to opinion on three different aspects:

(A) Frequency of the fraud checks of the borrower.

(B) Credit proposals received encounters fraud or tempered information.
(C) Tampered information kind.

(A) Frequency of the Fraud Checks of the Borrower

Exhibit 6K shows that majority of banks check frequency of fraudulent activities

either once while sanctioning or on quarterly basis, some responses goes for monthly
basis as well however few are doing it annually or semi-annually. Results indicate
that in foreign banks, the fraud checks are done on quarterly basis (52%) but some
banks are doing it either monthly (8%) or once while sanctioning (40%). However,
the responses from public sector are completely diverse viz. 35.2% responses of the
bankers were doing fraud checks once while sanctioning, 33.6% respondents bankers
check on monthly basis, 23.2% quarterly and 8% were doing every six months.
 Exhibit 6K - Frequency of the Fraud Checks of the Borrower

Whereas, the private sector is majorly doing these fraud checks quarterly (47%) and
rest of the respondents employees banks’ are doing it either once while sanctioning
(37%) or on annual basis (15%) {Appendix 10}. From this view it can be concluded
that the banks are not following any specific timely system of fraudulent checks on
the borrower once the amount of loan is sanctioned. There is absolute disparity among
various banks on this aspect..

(B) Credit Proposals received encounters Fraud or Tampered Information

Exhibit 6L shows that from the client or applicants’ side the probability that the banks
receive any fraudulent information is responded majorly as somewhat probable.

Exhibit 6L - Probability of Tampered Information

Across sectors, the majority of respondents suspect probable chances of receiving

fraudulent information from client’s side (Appendix 11). But, public sector banks are
encountering more such issues since they have shown 12% of its responses in very
probable zone. Around 16% respondents of this sector are neutral and 12% have
denied any such issues. Whereas the private sector banks responses are higher
towards such encounters (83%). And 15% have not encountered these cases as yet
and 2% are neutral. Although, on this issue the banking industry is majorly falling on
one side stating high end probability of such fraudulent information.

(C) Kind of Tampered Information

While receiving credit proposals the bankers do encounter with various tampered
information, the respondents were further explored to find the kind of information that
is usually tampered.

Exhibit 6M shows the various responses on type of tampered information. The major
tampered aspect is accounting information (88% responses), Accounts in arrears
(81.09%), Group/Subsidiary Company’s information (69.09%) and the least possible
tampering is done with basic information (26.18%).

Exhibit 6M - Type of Tampered Information

The empirical findings exhibit that public sector banks majorly (51%) stated that all
the mentioned kind of frauds they encountered but out of remaining responses more
responses are towards the accounting information, accounts in arrears, group/
subsidiary information, very few mentioned about basic information (Appendix 12).

However, in public sector the major (65.6%) encounter was with accounting
information, accounts in arrears, group/subsidiary information. Remaining responses
are towards the fraud of accounting information and accounts in arrears with 23.2%,
and 8% responses stated it to be not applicable. From this survey it can be said that
public sector banks do not encounter the basic information tampering. Whereas, in
case of foreign banks some similarity is with public sector except that they have seen
basic information tampering in some cases (8%). The majority in this sector is
towards again accounting information, accounts in arrears, group/subsidiary
information. Thus, although some variations are there in the sector but the three major
fraud types are coming to be accounting information, accounts in arrears, group/
subsidiary information.

6.1.3.6 Use of Sensitivity Analysis

While doing credit assessment of a credit application, the banks use sensitivity
analysis. It is done to identify if the business situation gets worsen up in future what
would be the impact of that situation on the business of the applicant. Will the
applicant be in the position to pay back the borrowed funds in that situation? The
bankers were asked that whether the sensitivity is part of the credit performance score
of the customer assessment. The respondent bankers from all the sectors of banks
agree on the use of sensitivity analysis to examine the credit score of the borrowers
(Appendix 13).

6.1.3.8 Borrowers’ Non-Financial Details

While assessing loan applications, apart from the financial details of the borrower
certain non-financial details are obtained in order to know the applicant and its
business in detail. This usually supports the decision-making in regards to loan
approval.

The results in exhibit 6N, predicts that for term-loan majorly all the additional details
are demanded by the banks. These additional details include management detail,
manufacturing process, technical evaluation of the project, installed and licensed
capacities, date of commencement of business or project, project details, schedule of
implementation, marketing details, competitor’s details and overall group or
subsidiary analysis.
 Exhibit 6N - Borrowers’ Non-Financial Details

However, in case of working capital and non-fund based facilities the banks require
few of the mentioned additional details apart from the financials of the concern.
Majorly banks had opted for management details, manufacturing process, marketing
details, competitor’s details and overall group or subsidiary analysis as additional
details for both the types of loans. But, some has shown requirement towards installed
and licensed capacities (37.81%-working capital and 36.7%-non-fund based loans),
date of commencement of business (33.81% for both the loan facilities), technical
evaluation of the project (32.7%-working capital and 32%-non-fund based loans).
Nonetheless, very few respondents have shown the requirement of project details,
schedule of implementation as appraisal requirement.

Exhibit 6O - Sector Wise Borrowers’ Non-Financial Details

Criteria Banks’ Term Loans Working Non Fund

Sector Capital Loans Based Loans
Management Details Public 100 (100%) 100 (100%) 100 (100%)
Private 100 (100%) 100 (100%) 100 (100%)
Foreign 50 (100%) 50 (100%) 50 (100%)
Manufacturing Public 100 (100%) 91 (91%) 91 (91%)
Process Private 100 (100%) 91 (91%) 91 (91%)
Foreign 50 (100%) 41 (82%) 30 (60%)
Technical Public 100 (100%) 19 (19%) 17 (17%)
Evaluation of the Private 100 (100%) 19 (19%) 17 (17%)
Project Foreign 50 (100%) 20 (40%) 20 (40%)
Installed and Public 100 (100%) 53 (53%) 51 (51%)
Licensed Capacities Private 100 (100%) 53 (53%) 51 (51%)
 Foreign 50 (100%) 0 0
Date of Public 100 (100%) 37 (37%) 37 (37%)
Commencement of Private 100 (100%) 37 (37%) 37 (37%)
Business / Project Foreign 50 (100%) 10 (20%) 10 (20%)
Project Details Public 100 (100%) 4 (4%) 4 (4%)
Private 100 (100%) 4 (4%) 4 (4%)
Foreign 50 (100%) 20 (40%) 20 (40%)
Schedule of Public 100 (100%) 4 (4%) 2 (2%)
Implementation Private 100 (100%) 4 (4%) 2 (2%)
Foreign 50 (100%) 0 0
Marketing Details Public 100 (100%) 53 (53%) 51 (51%)
Private 100 (100%) 53 (53%) 51 (51%)
Foreign 37 (74%) 49 (98%) 49 (98%)
Competitor’s Public 100 (100%) 48 (48%) 48 (48%)
Details Private 100 (100%) 48 (48%) 48 (48%)
Foreign 36 (72%) 49 (98%) 49 (98%)
Overall Group/ Public 100 (100%) 100 (100%) 99 (99%)
Subsidiary Analysis Private 100 (100%) 100 (100%) 99 (99%)
Foreign 50 (100%) 49 (98%) 49 (98%)

Sector-wise review regarding the additional details for loan assessment reveals that in
case of ‘term loans’ all the private and public sector banks require all the type of
details mentioned in the table above. But, the foreign banks have shown a different
view. They require all the other details except marketing and competitor’s details (74%
and 72% respectively) of the borrower.

However, in case of ‘working capital loans and non-fund based loans’ in private
sector banks the major requirement is of management details (100%), manufacturing
process (100%), overall group/subsidiary analysis (100%), installed licensed capacity
(more than 50%), marketing details (above 50%), competitor’s details (48%). In
public sector banks the scenario is bit different they have majorly shown requirement
of all the additional details mentioned above except project details (15% responses)
and schedule of implementation (11% response). Whereas in case of foreign banks the
major important aspects are management details (100%), manufacturing process
(more than 60%), marketing details (100%), competitor’s details (100%), overall
group/subsidiary analysis (100%). But, the two aspects are not at all asked by foreign
banks are installed and licensed capacities and secondly schedule of implementation.
Thus, on this aspect the variation of banking sector is clearly visible on all the types
of loan facilities.

6.1.3.9 Implementation of credit risk management minimizes delinquencies

A loan is said to be delinquent if any of its scheduled payments are in arrears by a

period more than three months. Generally, with the proper and timely implementation
of credit risk management reduction has been seen in number of delinquencies in the
banks. The data collected during the study confirmed the same as across banking
sectors (Appendix 14). All the sector of banks agrees on the minimization of
delinquencies after implementation of credit risk management.

6.1.3.10 Effectiveness of credit risk management tool

“Credit granting procedure and control systems are necessary for the assessment of
loan application, which then guarantees a bank’s total loan portfolio as per the bank’s
over-all integrity” (Boyd, 1993). While assessing the credit applications various banks
uses which tool of credit risk management and the respondents were asked to rate the
effectiveness of the tool they use. Excerpts of the effectiveness of credit risk
management tool are shown in the Exhibit 6P.

Exhibit 6P - Effectiveness of Credit risk management tools

Exhibit 6P shows credit assessment is having excellent as a tool of credit risk

management but all the other tools majorly falls under good category and striving
towards excellent.

Sector wise for private, public and foreign banks in the case of credit assessment the
majority of responses are stating it to be either good or excellent. Whereas the
responses for the ‘monitoring and credit control’ as tool are contrastive – in foreign
banks the majority is stating it to be excellent with 20% responses as average, in
public sector the maximum (122 out of 125) is specifying it to be either good or
excellent and in public sector the majority is marking it to be excellent but rest is
either in favour of average or good.

Further, the disbursement as per banking sectors is primarily falling in the category of
good and excellent except for foreign banks 20% responses stated it to be average.
Post disbursement monitoring is an important tool to be used by banks in order to
reduce the credit risk. In foreign banks, the post disbursement monitoring has been
majorly excellent and rest as good, but in public sector banks it is getting 62.4% as
good and rest 24% as excellent with 13.6% as average; in private sector the majority
(68%) is towards excellent and rest 20% good and 12% average.

For Q-MIS and Financial folio report the scenario is respectively excellent and good
in public sector banks however the case is different in foreign banks and private banks.
For foreign banks around 60% marks it to be excellent and 40% as average and in
private banks also majority marks them as excellent but rest of the responses shows to
be average. Thus, on this aspect, the variation can be seen in extensively all the tools
of credit risk management across banks.

6.1.3.11 Parameters for measuring the effectiveness of Credit risk management

In order to measure the effectiveness of the credit risk management applied by the
bank what all parameters would be considered. Exhibit 6Q shows the parameters that
are more important in the assessment of effectiveness of credit risk management are
non-performing assets percentage and reduction in credit default rate.

Exhibit 6Q - Parameters for measuring the effectiveness of Credit risk

management

However, Exhibit 6R presents the more peculiar view about the parameters
considered across sectors. The data analysed shows that for foreign banks the
parameters are non-performing assets percentage (40%), portfolio growth of the
organization (20%) and reduction of credit default rate (20%). Whereas the for public
sector the parameters are non-performing assets percentage (81.6%), portfolio growth
of the organization (44.8%), asset liability management (52%), reduction of credit
default rate as 71.2% and portfolio rating and revenue from assets as above 24%.
However, in private banks the review dissimilar with other sectors although the
highest weightage is towards non-performing assets percentage (82%), reduction of
credit default is the second highest with 51% and portfolio rating with 50% is at third
rank and parameters like portfolio growth and revenue from assets are just above 30%
bracket.

Exhibit 6R – Sector Wise Parameters for measuring the effectiveness of Credit

risk management

Parameters Foreign Public Private Banks

Banks Banks (100)
(50) (125)
Non-Performing Assets Percentage 20 102 82
Portfolio Growth of the organization 10 56 38
Portfolio Rating 0 30 50
Revenue from assets 0 32 31
Asset Liability Management 0 65 8
Reduction of Credit Default Rate 10 89 51
All of them 30 21 15

Thus, the variation is visibly clear on the consideration of parameters in identifying

the effectiveness of credit risk management.

6.1.3.12 Implementation of credit risk management minimizes bad debts

Loans that could not be collected or are unreasonably difficult to collect are termed as
bad debts. With the implementation of the credit risk management whether banks has
seen any reduction in these bad debts or banks are still forced to write-off these bad
debts. From the responses, it is evident the all the respondents have agreed on the
reduction of bad debts after the implementation of credit risk management in the bank
(Appendix 15).
6.1.3.13 Problems encountered during bad debts recovery

A debt that is not collectible and therefore is worthless to the creditor is usually
termed as bad debt. This occurs after all the attempts are made to collect the debt still
the amount is unpaid. In this the collector confronts various problems while dealing
with such bad debts and their recovery process. The respondents’ were asked to
respond on various problems they usually suffer while dealing with such debts.
Exhibit 6S shows that the major issue is with the delay in court proceedings, willful
default, where about unknown and legal enforcement issues many a times.

Exhibit 6S - Problems encountered during bad debts recovery

Problems Type Foreign Banks Public Banks Private Banks
(50) (125) (100)
Where About Unknown of the customer 17 (34%) 91 (72.8%) 58 (58%)
Dishonesty, Unwillingness of customers 18 (36%) 43 (34.4%) 58 (58%)
and flaws in assessments sometimes
Willful Default 10 (20%) 102 (81.6%) 69 (69%)
Delay in court proceedings 19 (38%) 105 (70%) 70 (70%)
Legal Flaws 0 (0%) 2 (1.6%) 5 (5%)
Legal Enforcement Issues in collateral 5 (10%) 88 (70.4%) 29 (29%)
All of them 31 (62%) 20 (16%) 30 (30%)

In the type of problems the banks are facing during bad debts recovery for public
sector banks wilful defaults (81.6%), Where About Unknown of the customer
(72.8%), Delay in court proceedings (70%) and Legal Enforcement Issues in
collateral (70.4%). The opinion is similar in private sector banks as well with wilful
defaults (69%), Where About Unknown of the customer (58%), and Delay in court
proceedings (70%). And in case of foreign banks they primarily encountered all the
issues (62%) of bad debts recovery. However, Dishonesty, Unwillingness of
customers and flaws in assessments sometimes (58%) is majorly seen by private
sector bank. Thus, on this aspect there is a similarity in the views of all the sectors.

6.1.3.14 Requirement of Additional Details

In doing the assessment of the credit proposals apart from the financial and non-
financial details of the applicant, sometimes the need for certain additional details
specific for a proposal arises. For instance in a proposal related to the import of
certain technology, bankers check the technology partners and the legal papers related
to that. This was also asked to the bankers and the findings indicated the use of all
such additional details and sector wise also the scenario is more or less the same
(Exhibit 6T).

Exhibit 6T - Sector wise requirement of Additional Details

Requirements Foreign Banks Public Banks Private Banks

(50) (125) (100)
Financial Sponsors of the project for 0 25 (20%) 40 (40%)
which funds are borrowed
Technology partner 0 25 (20%) 37 (37%)
Industry Analysis 0 25 (20%) 18 (18%)
Environmental clearances 0 10 (8%) 20 (20%)
Other statutory clearances 0 0 24 (24%)
All of them 50 (100%) 100 (80%) 60 (60%)

6.1.4 Credit Scoring and Rating system

“Credit scoring procedures, assessment of negative events probabilities, and the

consequent losses given these negative migrations or default events, are all the
important factors involved in credit risk management systems” (Altman, Caouette, &
Narayanan, 1998).

6.1.4.1 Application of Internal Credit Scoring/Rating

Internal credit score is a statistically derived numeric expression of a borrower’s

creditworthiness that is used by the lender banks to access the likelihood that a person
will repay the debts. The respondents’ shows absolute agreement (except 1 from
foreign banking sector) of all the sectors of banks on the use of internal credit scoring
and rating system (Appendix 16).

6.1.4.2 Frequency of the Review of Credit Score

Respondents were asked that when their banks uses internal credit scores what is the
frequency of reviewing those scores. And the Exhibit 6U shows very contradicting
aspect. Majority (49.5%) of the banks review these scores regularly before and after
the loan is being sanctioned however 32% have a system of only reviewing once
before sanction. Some other bankers have the process of quarterly review as well
(14.55%), and few (4%) have the monthly review system being followed.
 Exhibit 6U - Frequency of the Review of Credit Score

Viewing this across sectors shows that only public sector banks has the monthly
review system (8.8%), with majority opted for once before sanction (48.8%) and 30.4%
only goes with regularly before and after sanction and rest 12% had mentioned
quarterly reviews (Appendix 17). However, in foreign banks majority follows the
regularly review with 20% respondents mentioning quarterly reviewing system.
Whereas, the private banks are also majorly following regularly before and after
sanction reviewing system, with around 27% opting for once before sanction and 15%
with the quarterly review. Thus, the reviewing of credit scores also presents the
variation across banking sectors.

6.1.4.3 Application Scoring System for Probability of Default

Application scoring is the system in which the bank on the basis of internal
assessment of the loan application provides a score. This score in the assessment is
calculated on the basis of the information provided by the applicant that includes the
financial and non-financial details. With the help of this application system, the
probabilities of default or repayment issues are identified.

The study attempts to explore that on the basis of the information at the time of
receipt of a loan application, whether a bank applies any application scoring system
for identifying the probability of default and the type of scoring system being applied.

(A) Do banks apply Application-Scoring System?

Results indicates that all types of bank categories agrees on the usage of application
scoring system that gives the probability of repayment problems or probability of
default (Appendix 18).

(B) If banks apply such system what are the major types of Application Scoring
System?

Another issue is to identify the types of scoring systems applied by the various banks
to identify the chances of problems in loan repayment or probability of default. The
foreign banks uses only one type of scoring system that is Internal-rating system
(Appendix 19). However, the public sector banks are varying on the type of scoring
system being applied. They are sensitivity analysis (32%), Internal risk rating system
(32%), rating model (19.2%), cash flow projections (14.4%), Ratios (2.4%). Private
sector is also on the similar lines used internal risk rating system (42%), sensitivity
analysis (33%), rating model (23%), and cash flow projections (2%). This implies that
across bank types there is an agreement on the use of application scoring system but is
varying on the type of application scoring system used.

6.1.4.4 Factors Affecting Credit Score

In the evaluation process of a loan proposal, the various factors are considered and the
banks under credit assessment process prepare a credit score for every proposal. Thus,
the study examined the weightage given to these factors in the calculation of the
credit score. From the Exhibit 6V, it can be derived that three utmost important
factors are financial performance, conduct with other banks and credit worthiness.

The actual weightage in calculating the importance factor for credit worthiness
calculation are (i) financial performance has got 70.91% responses as extremely
important and 29.09% responses as very important, (ii) conduct with other banks has
80.73% as extremely important, 18.91% as very important and 0.36% as moderately
important, and (iii) credit worthiness shows 84.36% responses as extremely important
and 15.64% as very important. Whereas, the management and experience has got
lower weightage in the overall credit score.
 Exhibit 6V - Factors Affecting Credit Score

Exhibit 6W – Sector Wise Factors Affecting Credit Score with Weightage

Factors Banks’ Somewhat Moderately Very Extremely

Sectors Important Important Important Important
Financial Public 0 0 29 96
Performance Private 0 0 31 69
Foreign 0 0 20 30
Management Public 0 3 122 0
Private 15 45 7 33
Foreign 0 10 20 20
Collateral Public 0 1 27 89
Private 0 1 34 65
Foreign 0 0 20 30
Experience Public 0 49 27 49
Private 15 18 20 47
Foreign 0 1 29 20
Conduct with Public 0 0 11 114
other banks Private 0 0 11 114
Foreign 0 0 20 30
Credit Public 0 0 11 114
Worthiness Private 0 0 12 88
Foreign 0 0 20 30

Exhibit 6W shows that the foreign banks except management all the other factors are
either extremely important or very important. However, for public sector banks except
experience all the other factors are either extremely important or very important.
However, in private banks the scenario is bit different. For them also the factors like
management and experience (15% and 45% respectively) are less important. Thus,
this also reveals the variation across banks.
6.1.4.5 External Credit Rating

Credit rating is an estimate of the ability of the applicant to fulfil their financial
commitments, based on previous dealings. Respondent bankers were asked whether
they use external credit ratings. The table shows that all the sectors of banks out
readily uses the external credit ratings in the credit assessment process (Appendix 20).

6.1.4.6 Type of External Credit Rating

In general when a loan application is received the banker himself evaluates the
customer and thus towards that end they get the customer rated by an external agency
(unsolicited rating). But, sometimes borrower himself obtains rating from an external
agency in order to fetch funds easily from the lending institutions (solicited rating).
Therefore, there are various different forms of ratings obtained by different bankers.

Exhibit 6X - Type of External Credit Rating used in credit assessment

Thus, this was asked to the bankers in order to know the form of rating being used in
the banking industry. Exhibit 6X conforms the maximum usage of solicited ratings
and then the unsolicited one on the second platform towards usage in the banking
industry. Default ratings and expected loss ratings are also being used in some banks
but very less usage is there of recovery rating.

Exhibit 6Y: Sector wise type of external rating used in credit assessment

Type of Rating Foreign Banks Public Banks Private Banks

Solicited ratings 40 124 99
Unsolicited ratings 43 90 36
Default risk ratings 18 42 3
Recovery ratings 2 17 1
Expected Loss ratings 30 17 2
Exhibit 6Y shows the sector wise response on the usage of external rating out of
various types. Across sectors of banks the foreign banks are using solicited,
unsolicited, default risk rating and expected loss ratings. And public sector banks also
use all the types of ratings with higher usage towards solicited, unsolicited and default
risk ratings. Whereas, the private sector banks usually uses the solicited and
unsolicited ratings.

Thus, the variation is seen in case of type of ratings being used by the banks in credit
assessment that is line with the findings of the study conducted by Ederington (1986).
Ederington’s study examines the ratings assigned by Moody’s and S&P and
concludes that “split ratings do not result from differences in rating standards or
weights attached to rating determinants, but rather that they represent random
differences of opinion”. As pointed out by BIS (2000), selection biasness is one
possible explanation for this result, since most agencies only publish ratings on
request (other than S&P and Moody’s), although Cantor and Packer (1997), oppose
this, by explicitly controlling this effect in their analysis.

6.1.4.7 External Credit Rating and its usage

The study have examined whether the external credit ratings used in credit assessment
evaluation of an application can be biased and if they can be biased then they should
be the secondary opinion in the credit assessment process.

(A) External Credit Rating can be biased

The reviews across banking sectors on the biasness of the credit ratings revealed that
the credit ratings could be biased. All the respondents except two members from
public sector have agreed on the biasness of the external credit raters towards an
applicant (Appendix 20 and 21).

(B) External Credit Rating should be considered as second opinion in Credit

Assessment Decision-Making

There is absolute agreement among respondents from all the banks under study that
the external credit ratings should be considered as a secondary opinion factor in the
decision making of credit assessment (Appendix 22).

6.1.4.8 Overall Credit Risk Management Experience of the Bank Employees

This part assesses the overall experience of the bankers on the credit risk management
of the bank in which they are employed. This would provide the scope if any for
further modification in the bank’s credit risk management process. Exhibit 6X shows
the level of experience these respondents shared about credit risk management of the
bank.

Exhibit 6Z - Overall Credit Risk Management Experience of the Bank

Employees

From the above Exhibit it can be observed that the employees in the banking sector
seek minor improvements to be made in the existing credit risk assessment process.
Across sectors the overall experience on the credit risk assessment process of the
banks for foreign banks reveals that the employees in this sector expects minor
improvements in the process whereas around 20% respondents seek major
improvements to be made in this process. In fact, responses for the public sector
banks are towards excellent as 19.2%, good 15.2%, and minor improvements as
61.6%. This shows that public sector bank employees are more satisfied by the
process being followed (Appendix 23).

Whereas in private banks majorly the fall is towards minor improvement but catering
excellent and good both as 13% of the score. Thus, this again showing variation on
the overall credit risks assessment experience as well.

6.2 Cluster Analysis and its results

This research is furthered by performing two-step cluster analysis. In case of large

data sets and in a situation when the categorical variables are also included in the data,
the use of two-step clustering is recommended. This type of clustering creates sub-
clusters using hierarchical methods.
The analysis performed provides significant output, as well as variable importance
charts. The empirical results of the cluster analysis are shown in the forthcoming part
of this chapter.

“The first step in the analysis is to examine the data and make the necessary
transformations. The starting point is standardization of the variables. The two-step
analysis performs standardization of the continuous variables, yet the final results are
given in original values of the variables. The question about the outliers is solved by
the Mahalanobis D2 distance measure” (Hair et.al. 2005). The two major reasons for
performing cluster analysis are -

• Examine clusters to determine characteristics unique to that cluster.

• Examine fields across clusters to determine how values are distributed among
clusters.

6.2.1 Clustering of the steps in Credit Appraisal process

The quality of the solution and the silhouette measure overall goodness-of-fit shows
that the cluster quality is extremely good reaching the last part of the graph. The
model indicates five clusters with ratio of sizes as 11.50, which shows a high
variation in the clusters from largest to smallest. The clusters are distinct in the
percentages share with 18.9% for cluster 1, 17.5% for cluster 2, 41.8% for cluster 3,
18.2% for cluster 4 and 3.6% for cluster 5 (Appendix 24).

The interpretation of the clusters profiles shows that cluster 3 has 41.8% responses
and cluster 5 has 3.6% responses covers all the responses from public sector banks.
Cluster 1 (18.9% responses) and cluster 2 (17.5% responses) covers the respondents
from private sector banks. Whereas sector 4 with 18.2% of the total responses belongs
covers all the respondents from foreign banks.

However, a huge amount of variation is clearly visible on the steps in the credit
appraisal process. Steps like as7 that is projected profitability; balance sheet, cash
flow and funds flow details are required by cluster 5 (public sector) and cluster 2
(private sector) members but are not required by cluster 1 (private sector), cluster 3
(public sector) and cluster 4 (foreign banks). Similarly, for all the steps in the
assessment the clusters in the same banking segment are having different views. But,
as4 that is monthly, quarterly, half yearly reports is not required by any of the banks
in credit appraisal and assessment steps.

Thus, the as7 that is projected profitability; balance sheet, cash flow and funds flow
details requires a proper examination for variation in the clusters. Whereas the
clustering analysed that the respondents from cluster 1, 3 and 4 (covering the majority
response that is 217 out of 275) majorly use the combination of all the steps of
appraisal.

6.2.2 Clustering of Perceived reasons for the Loan Rejection

The lower part of the output from model summary indicates the quality of the solution
and the silhouette measure overall goodness-of-fit shows that the cluster quality is
satisfactorily fair. The model indicates four clusters with ratio of sizes as 7.24, which
shows a high variation in the clusters from largest to smallest. The output shows the
clustering variables mean value across the all the four clusters as well as their relative
importance (Appendix 25).

From the predictor importance values it is clear that 55.7% responses are falling in
cluster 2 covering 78.3% respondents belonging to public sector banks. It can be
depicted that the major reasons for loan rejection in this cluster are market references
of the borrower from its customers and suppliers (with mean value 5.0), Quality of
cash flow or earnings (mean value 5.0), site visit (mean value 5.0), economic concern
(4.99), due diligence (4.91).

The next major weightage is falling for cluster 4 with 22% responses and this cluster
is covering 100% responses from private bankers. The model shows that the major
reasons for loan rejection in this cluster are market references of the borrower from its
customers and suppliers (with mean value 5.0), Quality of cash flow or earnings
(mean value 5.0), site visit (mean value 5.0), economic concern (5.0), due diligence
(5.0). Whereas the next cluster in order of weightage is cluster 1 with 14.7%
responses and it covers 92.5% of private bankers’ responses. The major rejection
aspects are Quality of cash flow or earnings (mean value 4.92), economic concern
(4.65), due diligence (3.92) and incompetent management team (3.90).

The last in order of weightage is cluster 3 comprises of only 7.7% responses (covering
only 21 respondents), out of which 95.2% are foreign bankers. The loan rejecting
aspects are market references, insufficient operating history, site visit, company size,
existing debt load, due diligence, personal guarantee having a mean value as 5.0.
However, from the predictor importance it is evident, that the aspects shown with
darker colour are the one that shows huge variation among clusters. The varying
aspects of loan rejection among clusters are market references from
customers/suppliers, insufficient operating history, quality of cash flow, and site visit.
Thus, the probable reasons for rejection of loan need to be synchronized among all the
sectors of the banks.

6.2.3 Clustering of Loan Collateral required in different loan facilities

The quality of the cluster solution is indicated in the lower part of the model summary
output. The clustering solution’s overall goodness-of-fit is shown by the silhouette
measure of cohesion and separation. The average distance between the objects is the
essential base and it can vary between -1 and +1. Specifically, a silhouette measure of
more than 0.50 indicate a good solution, a measure between 0.20 and 0.50 a fair
solution, whereas values of less than 0.20 indicates a poor solution quality (Appendix
26). In the case of clustering the loan collateral for different loan facilities, the
measure indicates a satisfactory cluster quality. Consequently, an evaluation tool that
graphically presents the structure of the revealed clusters is shown further.

The main view shows the importance of each feature and variable that has been input
to the model. This output shows the clustering variables mean value across the three
clusters as well as their relative importance. From the predictor importance figure it is
clear that 81.5% responses are falling in cluster 1 which states that all the types of
collateral are required for term loans with 0.86 as mean value, working capital loans
with mean 0.71 and non-fund based with 0.55 mean value. Whereas, for the non-fund
based facilities the importance of mortgage as collateral has also shown in this cluster
with mean value as 0.41.

The cluster 2 comprises of 14.2% with hypothecation (having mean value as 1) as the
major collateral for working capital loans with personal guarantee getting 0.56 mean
value, Whereas, in case of term loans the required collaterals for this cluster are
mortgage having mean of 0.95% and personal guarantee 0.90%. Also, for non-fund
based facilities major collaterals in this cluster appeared to be as hypothecation with
mean of 0.95 and personal guarantee with 0.62.

The last cluster comprises of only 4.4% responses (covering only 12 respondents). In
this cluster the results are almost similar to cluster 2 with hypothecation (having mean
value as 1) as the major collateral for working capital loans and for term loans the
collateral with importance is mortgage getting a mean score as 1.0. And, for non-fund
based facilities the mean score of hypothecation is 0.92.

However, from the predictor importance it can be inferred, that the collaterals
required for various loans are turning up to be (i) for term loans – all the types of
collateral are important but (ii) for working capital loans – hypothecation is the most
important and (iii) for non-fund based loans also – all the types of collaterals are
required. Thus, while predicting the loan facilities to be provided to the borrowers the
requirement of collaterals can be invariably taken as all the three covering mortgage,
hypothecation and personal guarantee.

However, “the studies of bankers' credit and lending decision processes have shown
that bankers give great emphasis on accounting data” (Beaulieu, 1994, 1996) as well
as on “characteristics of the entrepreneur applying for credit” (Hedelin and Sjoberg,
1993), but little weight is given to the collaterals. Hedelin and Sjoberg (1994) found
“that no credit managers in development funds and county councils believed that
collateral had an influence on credit decisions.” In fact, Rosman and Bedard (1997)
found “that loan officers who used effortless decision processes (i.e., evaluating few
items of information) were prone to demand collateral. The authors in this study also
explored the relationship between demanding collateral and risk attitude, but no
correlation (r =0.08) was found.”

While advancing credit the two types of risks occurs: (i) the risk of permitting credit
to non-paying customers as well as (ii) the risk of refusing credit to paying customers.
Erroneous credit granting implies credit losses, while faulty denying of credit may
result in losses of sales. The first type of risk can be eliminated or reduced to certain
level by requesting collateral securities at the time of credit risk assessment. Since,
banks do not keep records of the customers whom loan was refused; the second risk is
difficult to measure.

6.3 Collateral Requested in Credit Assessment

In accordance with Fishbein and Ajzen's theory (1975), the respondent banking credit
assessors were asked about their intentions towards requesting collateral securities
when they felt uncertain about the customer's ability to repay the amount borrowed.
 Exhibit 6AA - Distribution of Collateral requested in Credit Assessment
(N=90)
Collateral Almost Almost
Requested Always always Often Sometimes Seldom Never Never
Scale 7 6 5 4 3 2 1
7.8% 7.8% 21.1% 40.0% 11.1% 10.0% 2.2%
Mean 4.23%
SD 1.38
Exhibit 6AA shows on an average, the respondent credit assessors’ majorly used
collateral securities sometimes (40%) and however 36.7% collectively stated that they
often, always or almost always requested collateral security. This number fairly
corresponds with the results of Demroth's (1993) study, which has shown “that 33%
of respondents often or always requested collateral.”

6.4 Attitudes to Request Collateral

In order to identify whether the attitude in requesting guarantees were related to

experience and performance of the business such as turnover and credit losses,
analyses of variance and other statistical tests were conducted. And the results showed
no significant relationship, but it did not provided for different shades of attitude
about collateral being asked.

With the help of Fishbein and Ajzen's theory of reasoned action an attitude
measurement is created. In regards to collateral security eight out of the ten
statements were included in framing this attitude measurement. Two statements were
later excluded from the measurement: (i) requesting more collateral increases the
sales and (ii) a guarantee of surety forces customers to pay. The former statement was
discarded due to its reduction of the alpha coefficients, whereas the later one was
excluded because it was too specific. The alpha-coefficients for the remaining eight
statements were 0.74 and 0.73 respectively and thus they were considered as good
values.

On an average the attitude of credit assessors towards requesting collateral security

was restrained, indicated by a theoretical scale between +72 and -72. This attitude
measurement was on average 7.17 (SD=14.49). By using Spearman's correlation
coefficient, the correlation between intention to request collateral security and attitude
measurement was calculated, to rs = 0.33 (p<0.01). The correlation between credit
assessor’s behaviour (i.e., number of cases requiring collateral) and attitude
measurement was rs =0.25 (p<0.05), and the correlation between intention and
behaviour was rs = 0.28 (p<0.03). These results of the present study lie close to the
results of Kraus (1995) study relating attitude and behaviour. Thus, it can be
summarized that attitude reflects to some extent an assessor’s intention towards
requesting collateral security and the resulting behaviour.

Further, this study identified that in what way the attitude measurement was related to
the credit assessor’s attitude to risk, experience and gender. There were weak
correlations between on the one side attitude measurement, intention to request
collateral, and behavior and on the other side attitude to risk, experience and gender
(Appendix 27). The calculation of a multiple regression equation was disregarded due
to this reason. Risk attitude and attitude measurement has a significantly weak
negative correlation, which means that credit assessors having risk-aversive nature
tends to have positive attitudes towards collateral security. It should, however, be
noted that only about 3.3% of the variance in the attitude measurement could be
explained by the risk attitude and the weak correlation (rs = 0.19). This is a very weak
explanation value. However, the corresponding correlation was not found when it
came to intention and behaviour.

Based merely on the statement expressing disadvantages of collateral an attitude

measurement yielded a somewhat higher degree of correlation with risk attitude (rs =
0.28, p<0.05). The explained variance increased little bit (4.6%) but was still small.
The lesser correlation was shown between attitude measurement and intention to
request collateral security (rs = 0.29). A measurement of attitude only made up by
statements expressing advantages with collateral caused no significant changes in the
correlations between the attitude measurement and risk attitude: They remained
unrelated.

A corresponding result was also found with regards to intention and behaviour.
However, the answers become more general by combining all collateral. The
responding bankers point out that different collateral should carry different intentions,
attitudes, and behaviour. Using the Kruskal-Wallis non-parametric analysis of
variance this question was evaluated.

For the group of credit assessors who used bank guarantees, it was noted that they had
a stronger intention to request collateral than the group who did not use such
guarantees (mean ranks 33.44 and 52.31 respectively, chi-square = 9.31, p<0.021).
Credit assessors who used guarantees of surety while lending has also shown the same
tendency (mean ranks 36.86 and 62.39, chi-square = 5.47, p = 0.01) and those who
asked applicants for mortgages (mean ranks 42.99 and 62.06, chi-square = 5.39, p =
0.01). This was, however, incorrect for the attitude measurement or behaviour.

It is, therefore, possible to evaluate which type of collateral the respondents had as a
starting point when they answered the statements, which made up the basis for the
attitude measurement. There were no significant differences observed between the
groups using the four types of collateral securities (i.e., bank guarantees, mortgages,
pledges and guarantees of surety) and the attitude measurement. It seemed that
experiences of the respondents did not affect or influenced their requirement for
collateral securities, which supports the assumption that the attitude measurement was
of a general nature. Thus, the hypotheses 1 and 2 are rejected.

6.5 Concluding Remarks

In this chapter with the help of cluster analysis and cross tabulations it has been
explored that the subsets of credit risk assessment system like credit appraisal method,
credit rating, credit scores etc. differ across banks. The range of grades and risk
associated with the each grade also vary across these banks. And this implies that
lending decision for one particular borrower is also different across banks. The
empirical results also highlights that these differences are due to personal attributes of
experts (credit analysts) while making credit decisions. This result castes doubts about
the decision attributes and risk attitude of the credit assessors in making any credit
decisions.

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