KEY RATING FACTORS

Marks to be
given
1. Qualitative Business Risk
Factors (Risk Management and
Factor 40%) Systems
Operative Environment
2. Financial Factors Profitability
(Risk Factors30%) Liquidity
Capital Adequacy
Asset Quality
3. Co-operative Co-operative linkages
Character (30%)
Overall
 Business Risk
1. Pace of growth
2. Track record
3. Outlook on the economy
4. Competitive position

Note: It is to be analysed by capturing information on sub-parameters i.e. (i) Relative

Scale of operation; (ii) Diversification; (iii) Operating Efficiency; and (iv) Project Risk
and using these to make comparison across various similar type co-operatives.
The assessment of the performance of various sectors through business cycle, its
outlook on the economy and issues related operating environment and
competitive position and responsiveness to market changes. As for track record,
this is evaluated in relation to completed business cycles.
 Management and Systems
1.Governance issues
2.Quality of management
3.Systems and policies
4.Strategy followed
5.Accounting quality
6.Capitalisation
Note: The above parameters are to be analysed on building blocks on which credit risk profile is
build. These may be broadly classified as :
i)Experience of promoted co-operators i.e. Performance of other co-operatives of same promoted
co-operator.
ii)Commitment to the line of business concerned.
iii)Ability of organise and raise capital from members.
iv)Proper delegation of powers and now these are utilised by line managers and these are in
Harmony to broader objective of society.
v)Whether Internal checks and internal audit to risk management issues and control systems are in
place and consistent and fair Accounting Policies are followed.
 Operative Environment
1. Overall economic conditions
2. Prospects of the industry related issues
3. Regulatory environment

Note: In assessing the operating environment, the overall economic condition,

prospect of activity related to business is to be assessed and regulatory frame
work need to be looked into. Intensity of competition also has a bearing as it can
change the growth prospects. Therefore, evaluation may focus on current level
of competition as well as attractiveness for potential competition.
 Profitability
1. Ability to generate adequate returns
2. Operating expenses
3. Profitability starts with operating income to operating expenses
4. Financial flexibility and its strategy
5. Operating expenses in relation to total assets and cost to income ratio and how it
compares the same with that of its peers or other entities
6. Asset quality profile and the profitability indicators compared across peers

Note: A very high return may not be necessary for high rating as underlying risk could
also be very high as well.
 Liquidity

1. To maintain a favourable liquidity profile for the smooth functioning

2. To honour its debt commitments in a timely manner
3. Maturity profiles of its assets and liabilities, the resulting asset-liability maturity
gaps and the back-ups available to plug any gaps and meet future requirements
 Capital Adequacy
1. Capital provides the second level of protection to debt holders (earnings being
the first) and therefore its adequacy (in relation to the embedded credit, market,
and operating risk) is an important consideration for ratings.

Note: Leveraging of capital and ability raise capital for society needs to be looked into.
A high leveraging of capital will be highly risky, it should be moderate as per the
generally accepted norms.
 Asset Quality(For Financing
Institution i.e. Co-operative Banks)
1. Asset quality plays an important role in indicating the future financial
performance
2. Focus is on lifetime losses, variability in losses under various scenarios and the
cushions available
3. Protect the debt holders from unexpected deterioration in asset quality

Note : Asset quality assessment covers among other factors, riskiness of loan mix, risk
appetite, credit decision making and track record in managing loan book through
lifecycles, trend in delinquencies, Gross NPA percentage, Net NPA percentage,
and Net NPAs in relation to Net Worth.
The above is for Credit Institution.
 Co-operative Character

As Co-operatives are members organisation, the points for consideration would be :

i) Participation of primary members of society in the business of co-operative i.e.

How much of the society’s operation are dependent on members participation.
ii) How the members are being supported by co-operative i.e. in Input mechanism
in their produce.
iii) How the return/surplus of society is distributed to members, i.e. what
percentage price realisation is given to members and by way dividend etc.
distributed to members.