International Journal of Innovation, Management and Technology, Vol. 1, No.

4, October 2010
ISSN: 2010-0248

Credit Scoring Model for Auto Ancillary Sector

Srinivas Gumparthi, Dr.V.Manickavasagam and M.Ramesh
Dr.V.ManickavasagamProfesso
r & Controller of Examinations,
Department
of
Corporate
Secretaryship,
Alagappa
Karaikudi,
Abstract The Indian auto component industry has been University,
passing through a period of rapid development in its India(email:drvmalucorp@yahoo.
structure and competition. Global competition and the com).
recent shift in focus of global automobile manufacturers, M.Ramesh SSN School of
Management

dynamic changes in business rules and liberal policies of the

government of India are driving factors. The global auto
components industry is estimated at US$1.2 trillion. The
Indian auto component sector has been growing at 20% per
annum since 2000 and is projected to maintain the highgrowth phase of 15-20% till 2015.

It is estimated that production of auto ancillaries at

US$10 bn in 2005-06 and has been growing at a robust
20% per annum since 2000. Exports of auto components
have been strong growing at 24% per annum since 2000.
This growth in exports if sustained for another five years
will see Indias auto components exports will touch US$
5 bn by 2011 from the US$ 2 bn at present. Since 2000,
the auto component industry has recorded an investment
level of Rs 18 bn and has attracted US$ 530 mn in terms
of foreign direct investment. Investments in the sector
have been growing at 14% per year. In 2005-06,
investments touched US$ 4.4 bn, and are expected to
grow significantly in future.
The Investment Commission has set a target of
attracting foreign investment worth US $ 5 bn for the
next five years to increase Indias share in the global
auto components market from the present 0.4% to 3-4%.
This is a sizeable target considering the meager amount
of FDI currently coming into the industry. The changing
perception of global auto makers is however fast altering
this scenario.
This emerging scenario has brought several
opportunities and challenges for investors, financial
institutions, banks and other NBFCs. Every investment
is associated with certain risk. Assessment of risk is an
important part of the credit risk management of every
commercial bank and also NBFCs which are extending
credit to these auto ancillary company which are part of
Small and Medium Enterprise segment of growing
industry.
The objective of the research was to design and
develop a credit scoring model to evaluate the
creditworthiness of the lease applicants from Auto
Ancillary sector. The existing credit appraisal methods
which are very subjective in nature and also very time
consuming due to unknown significance of factors
involved in the rating process. This justifies the need of a
credit scoring model.
Initially, the applicants were classified into three
categories based on the credit rating given by the
company Low, Moderate, and High Risk category.
Various financial and non-financial risk factors were
identified and a model was built using Multiple
Discriminant Analysis with the data obtained from 50
samples (Lease applicants). The idea was to classify the
new applicants based on their discriminant scores
obtained using the new model built.
Srinivas GumparthiSSN School of Management & Computer
Applications,
Chennai603110.
India,
email:srigumparthi@gmail.com ; srinivasg@ssn.edu.in

The model was validated

using the data obtained from
20
new
samples.
The
classification accuracy of the
model was 90%. Therefore,
the
model
built
was
considered highly reliable.
The
key
factors
that
determined the risk category
of applicants was identified.
It can be concluded that the
new model is highly reliable
and could help credit officers
to make objective decisions.
The new model can be finetuned further by including
additional relevant factors,
which could be an effective
supporting tool to measure
the creditworthiness of the
lease applicants.
Index Terms Auto
Industry, Credit,
Discriminant Analysis.

Risk Classification

9. INT
RO
DU
CTI
ON

1. Business
Environment
India is witnessing a
rapid upsurge on the
economic front. Although,
it had to battle with the
storm of global financial
crisis recently, it survived
and has so far, surpassed
most of its competitors. It is
still facing the challenges of
the grave economic crisis
and is on the sprint to
recover its former growth
rate.
The strong recovery of
Asia's
third
largest
economy in the last 10
months by successfully
overcoming the global
meltdown is proof of the
country's
power
of
resilience. The projected
GDP growth rate is 8.4 per
cent in 2010 - 11.
A developing economy

like India always craves for financial resources. NBFCs in India: NonDemand for credit is great and often organized banking
Financial
traditional financing institutions (like banks andCompanies (NBFCs) play a
financial institutions) do not meet such demand thus vital role in the context of
creating a space for other types of financing. Money Indian Economy. They are
lender is an age old institution filling such space. indispensable part in the
Opening up of economy gave a further boost to the Indian financial system
demand for credit.
because they supplement
At this juncture, NBFCs, which basically were the activities of banks in
better organized money lenders happened in large terms
of
deposit
number. NBFCs in India have played a useful role in mobilization and lending.
financing various sectors of the economy, particularlyThey play a very important
those that have been underserved by the banks. In fact, role by providing finance to
many banks are forming NBFCs to take advantage of activities which are not
their greater flexibility in dealing with customers.
served by the organized
362

banking sector. So, most the

committees, appointed to
investigate
into
the
activities, have recognized
their
role
and
have
recognized the need for a
well-established
and
healthy
non-banking
financial sector.
Non-banking
financial
companies constitute an
important segment of the
financial system. NBFCs
are the

International Journal of Innovation, Management and Technology, Vol. 1, No. 4, October 2010
ISSN: 2010-0248

industry enjoyed a good

intermediaries engaged in the run

across
various
business of accepting deposits and segments.
delivering credit. They play very Infrastructure
crucial role in channelizing the financing showed the
scare financial resources to capital way. The worst seems to
formation. NBFCs supplement the be over for the segment
role of the banking sector in which went through a
meeting the increasing financial lean patch in the
need of the corporate sector,slowdown-hit previous
delivering
credit
to
the financial
year.
unorganized sector and to small Infrastructure
local borrowers. NBFCs have Development Finance
more flexible structure than banks. (IDFC) managed to
As compared to banks, they can grow its loan book by
take quick decisions, assume 12% year-on-year in
greater risks and tailor-make their December 2009 quarter
services and charge according to compared
to
the
the needs of the clients. Their anaemic 3% growth it
flexible
structure
helps
in reported
in
the
broadening the market bySeptember quarter.
providing the saver and investor a The credit for this
bundle of services on agoes to the telecom
competitive basis.
sector which sought
NBFCs at present providing big money to fund its
financial services partly fee based rural foray. Housing
and partly fund based. Their fee finance
companies
based services include portfolio didnt fare badly either.
management, issue management, The Reserve Bank of
(RBI)
loan syndication, merger and Indias
acquisition, credit rating etc. their consistent efforts at
asset based activities include bringing down the
venture capital financing, housing interest rates had its
finance, equipment leasing, hire desired results. The
purchase financing factoring etc. In biggest player, Housing
short they are now providing variety Development Finance
Corporation (HDFC),
of services.
repeated
its
18%
NBFCs Operations:
The NBFCs that are registered growth in loan book in
December quarter. LIC
with RBI are:
1 Equipment leasing company Housing Finance did
better with a 35%
2 Hire-purchase Company
growth in loan book in
3 Loan Company
the same period against
4 Investment Company
32% in September
NBFCs are classifies as
quarter.
5 Asset Finance Companies Most of the NBFCs
(AFCs)
are performing well in
6 Investment Companies (ICs) their niche markets
7 Loan Company (LCs)
wherein they may not
8 Infrastructure
Financebe adversely affected
by any kind of
Company (IFCs)
slowdown at the macro
B. Future Trends
level. In the last fiscal,
The
non-banking
financial
NBFCs had faced
companies (NBFCs) seem to have some tough times due
scored over banks when it comes to to the sharp spike in
credit disbursement during the interest rates and low
December 2009 quarter. While the consumer and business
banking industry reported a sharp confidence.
fall in credit disbursal at 11%, the However, those days
slowest for the banking industry in are history. Experts
the current decade, the NBFC feel that even

with a minor increase in interest

rate, the demand for financing is
still going to be strong. Given this,
it wouldnt be a surprise if NBFCs
continue to outshine the banking
sector even in the future.

a
r
l
i
e
r

C. Key Definitions
C
r
Credit Risk: Credit risk arises
e
from the failure of counter party to
d
fulfill its contractual obligations
i
either during the course of a
t
transaction or on a future
obligation. Default is a discrete
S
state for the counter party. That is,
c
at best; the counter party makes
o
the requisite payment resulting
r
into a no loss situation and at
e
worst, the entire sum due is lost. A credit score is a
As such, it is a potential loss of numerical expression
valuable assets due to the probable based on a statistical
deterioration
in
the
credit analysis of a person's
worthiness of the counter party or credit files, to represent
if the counter party is not in a the creditworthiness of
position to fulfill its contractual that person. A credit
obligations. As such, credit risk score
is primarily
would inevitably follow underbased on credit report
such a scenario.
information typically
Credit Event: Credit eventsourced from credit
refers to a default resulting into abureaus. Lenders, such
no payment situation on anyas banks and credit
financial obligation. ISDA Mastercard companies, use
Netting Agreement for creditcredit
scores
to
derivatives has categorized theevaluate the potential
following events as credit event. risk posed by lending
Bankruptcy
money to consumers
1 Failure to make payment due and to mitigate losses
2 Obligation/cross
defaultdue to bad debt.
Scoring:
resulting from occurrence of a Credit
default on any other similar Credit scoring is an
obligation not being a failure eminently pragmatic
and empirical approach
to make payment due
3 Restructuring resulting intoto the problem of risk
of
terms that are less favorable assessment
individual debtors. The
t
h
emphasis
is
on
a
predicting defaults, not
n
on explaining why they
do or dont occur. The
e

363

basic elements of credit

scoring are:
1 A set of categories
of
information
called
Characteristics
or
Variables
with
their
corresponding
attributes, which
qualify
and/or
quantify how each
characteristic
applies
to
an
individual debtor
2 The
points
associated to a
particular attribute
as it pertains to an
applicant
3 A threshold or
cut-off value.
In credit scoring
terms, characteristics
refer to the questions
asked,
whereas
attributes
are
the
specific answers to
these
questions,
whether
they
be
provided
by
the
applicants or obtained
from other sources,
such as internal bank
data
or
public
registries.
Assessing Credit
Risk from Credit
Scoring:
Credit
Scoring provides an
objective assessment as
opposed to a subjective
tool that relies on a
lenders opinion. Here
objective refers to
giving a probability of
default. As such, credit
scoring
does
not
predict loss but it
predicts the

International Journal of Innovation, Management and Technology, Vol. 1, No. 4, October 2010
ISSN: 2010-0248

Lending Models', this

likelihood of payment problems. paper examines how
Lenders do rely on credit ratingapplication
creditagencies to measure credit riskscoring models for
and agencies to measure creditleasing differ from
risk and assign a probability ofmodels developed for
default. Credit rating agenciesbank lending. Models
generally slot companies into riskfor
bank
lending
buckets that indicate companysmeasure a clients
credit risk and are also reviewedlikelihood to repay a
periodically. Associated with eachcredit
obligation.
risk bucket is the probability ofModels for standard
default that is derived fromequipment
leasing
historical observations of defaultassess client repayment
behavior in each risk bucket.
risk, but also should
consider asset worth
II. LITERATURE and
vendor
REVIEW
relationships, both of
Altman, Edward I (1968),which affect the overall
Financial Ratios, Discriminant risk of a lease contract.
Analysis and the Prediction of Expert models for
Corporate
Bankruptcy,leasing can automate a
Academicians seem to be movingsophisticated, yet easy
toward the elimination of ratioto use, gap analysis of
analysis as an analytical techniquethe difference between
in assessing the performance of theoutstanding principle
business
enterprise.
Theoristsand
market resale
downgrade arbitrary rules of thumb,value, facilitating a
such as company ratio comparisons,tighter control of risk
for each
widely used by practitioners. Sinceexposure
attacks on the relevance of ratio leasing contract.
analysis emanate from many Harold Bierman,
esteemed members of the scholarly Jr., Warren H.
world, does this mean that ratio Hausman, (1970),
analysis is limited to the world of'The Credit Granting
"nuts and bolts"? Or, has theDecision', a series of
significance of such an approachprobabilistic models is
been unattractively garbed andformulated for the
therefore unfairly handicapped? Cancredit granting policy
we bridge the gap, rather than severof a firm. First, a
the link, between traditional ratio single-period analysis
"analysis" and the more rigorousis presented for the
problem,
statistical techniques which havetwo-action
"give
credit
or
do not
become
popular
among
academicians in recent years? Thegive credit." Then a
purpose of this paper is to attemptmulti-period analysis
an assessment of this issue--thefor the same problem is
quality of ratio analysis as an presented, showing that
single-period
analytical technique. The predictionthe
analysis
ignores
of corporate bankruptcy is used as
important
future
an illustrative case. Specifically, a
benefits.
The
multiset of financial and economic ratios
analysis
will be investigated in a bankruptcyperiod
contains
a
Bayesian
prediction context wherein a
multiple discriminant statisticalapproach to revisions
methodology is employed. The data of the probability of
used in the study are limited to collection as collection
experience is gained.
manufacturing corporations.
The
multi-period
Dean Caire (2005), 'Credit analysis is modified by
Scoring for Leasing - Howadding discounting to
Leasing Models Differ from Bank reflect the time value
of money and a

probability that the

customer will cease purchasing.

Next, a dynamic programming
formulation of the multi-period
problem is presented, and this
formulation is then adapted to
include a decision on how much
credit to offer. The paper closes
with a series of remarks
concerning
the
practical
application of the analysis.
John Stephen Grice and
Michael T. Dugan (2001), 'The
Limitations
of
Bankruptcy
Prediction Models', the purpose of
this study is to demonstrate
potential problems associated with
the use of bankruptcy prediction
models in current research. The
tests in this study demonstrate the
problems that may arise when
bankruptcy prediction models are
inappropriately
applied.
This
analysis evaluated the Zmijewski
(1984) and Ohlson (1980) models
using time periods, industries, and
financial distress situations other
than those used to originally
develop the models. The findings
indicated that both models were
sensitive to time periods. That is,
the accuracy of the models declined
when applied to time periods
different from those used to
develop the models. The findings
also suggest that the accuracy of
each model continues to decline
moving from the 19881991 to the
19921999
sample
period.
Additionally,
Ohlson's
(Zmijewski's) model was (was not)
sensitive to industry classifications.
The findings of this study also
suggest that the Ohlson and
Zmijewski models are not sensitive
to financial distress situations other
than those used to develop the

models.
Thus,
the
models appear to be
more generally useful
for predicting financial
distress,
not
just
bankruptcy. In sum, the
results of this study
suggest that researchers
should use bankruptcy
prediction
models
cautiously.
Applying
the models to time
periods and industries
other than those used to
develop the models
may result
in
a
significant decline in
the models' accuracies.
Additionally,
some
bankruptcy prediction
models may be more
appropriate
for
evaluating
various
forms
of financial
distress as opposed to
just bankruptcy. To
avoid
erroneous
applications
of
bankruptcy prediction
models in the future, it
is
necessary
for
researchers not only to
understand the uses of
prediction models, but
also to understand the
limitations
of
the
models.

Mark
Schreiner
(2000), Credit Scoring
for Microfinance: Can
it work?, In rich
countries, lenders often
rely on credit scoring
formulae to predict
risk based on the
364

performance of past
loans
with
characteristics similar
to current loansto
inform decisions. Can
credit scoring do the
same for microfinance
lenders
in
poor
countries? This paper
argues that scoring
does have a place in
microfinance. Although
scoring is less powerful
in poor countries than
in rich countries, and
although scoring will
not replace the personal
knowledge of character
of loan officers or of
loan groups, scoring
can improve estimates
of risk. Thus, scoring
complementsbut
does not replace
current
microfinance
technologies.
Furthermore,
the
derivation
of
the
scoring formula reveals
how the characteristics
of borrowers, loans,
and lenders affect risk,
and this knowledge is
useful whether or not a
lender uses predictions
from scoring to inform
daily decisions. In the
next decade, many of
the
biggest
microfinance lenders
will likely make creditscoring models one of
their most important
decision tools.
Montserrat Guillen
and Jose M.
Martinez (1994), A

International Journal of Innovation, Management and Technology, Vol. 1, No. 4, October 2010
ISSN: 2010-0248

combines
it
with
Model for Credit Scoring An subjective data about a
Application of Discriminant company
and
the
Analysis, The application of environment in which
statistical techniques in decision it operates. As the new
making, and more specifically for credit scoring model
classification requirements, has combines factual and
proved to be adequate in the subjective information,
context of financial problems. it can be used to
This
paper
presents
the evaluate all aspects of
methodology used and the results the company (lessee)
obtained in the elaboration of a and draw an overall
decision-support system for credit assessment of viability
assignment. The paper explains and creditworthiness.
the statistical techniques and the This
model
is
characteristics of data used for applicable only for
eliminating
discriminating auto ancillary sector
function. Some comments about Objective:
The
the application of the model are primary objective of
given and results concerning the this research is to
optimal level of risk are also provide a robust credit
discussed, in order to give clear scoring model which is
patterns for implementation.
free from subjectivity
Yong H. Kim and Venkatand has got empirical
Srinivasan
(1987),
Aproof for decision
Comparative
Analysis
of making. In this study
Classification
Procedures,we made an attempt on
financial classification issues, anddesign and develop a
particularly the financial distresscredit scoring model
problem, continue to be subject towhich is specific for
vigorous
investigation.
TheIndian Auto Ancillary
corporate credit granting processSector.
has not received as much attention Research Design
in the literature. The corporate Nature
of
the
credit granting process has notStudy: The study is
received as much attention in thedescriptive.
A
literature. This paper examines thedescriptive study is
relative
effectiveness
ofundertaken in order to
parametric, nonparametric andascertain and be able
judgmental
classificationto
describe
the
procedures on a sample ofcharacteristics of the
corporate credit data. Thevariables of interest in
judgmental model is based on thea situation.
Analytic
Hierarchy
Process. Sampling Design
Evidence
indicates
that Sources of Data:
(nonparametric)
recursiveThe data used is of
partitioning methods providesecondary type. The
greater
information
thandata were collected
simultaneous
partitioningfrom the applicants
procedures. The judgmental modelwebsites and annual
is found to perform as well asreports. The existing
with
the
statistical
models.
Arecords
company
were
also
complementary relationship is
as
the
proposed between the statisticalconsidered
source
of
data.
and the judgmental models as an
effective paradigm for granting Population: As the
model is built mainly
credit.
to classify the lease
applicants from Auto
III. RESEARCH
Ancillary Industry, the
METHODOLOGY
Need for the Study: The new population represents
model takes data from the all the auto ancillary
financial
components
and units in India.

Sample size: The data of 70 debtor is arrived at after

samples (Lease applicants from a thorough fundamental
Auto Ancillary Industry) were analysis of the issuer
taken for the analysis. Among the and his obligations in
to
the
70 units, 50 units were considered relation
particular
issue.
The
for building the model and the
analysis
remaining 20 units, were used for quantitative
derived
from
historical
validating the model.
and
future
Sampling technique: The data
projections
of
financial
sampling technique used is
under
judgment sampling. Only those statements
different
business,
records suggested by the credit
officer were taken for the market and economic
development and validation of the scenarios, is contrasted
with
qualitative
model.
appreciations
of
IV. DEVELOPMENT OF particular
characteristics of the
THE MODEL
issuer,
and
the
A. Identifying Factors That
environment.
Thus,
Influence Lending Decisions
things like the quality
The first
step in the of management and the
development of the model was the business strategy of the
identification of the various issuer, along with the
factors and risk associated with competition and the
each of the factor. For this regulatory requirements
faces,
whose
purpose, the various manuals and it
contribution
to
risk
are
websites pertaining to the credit
not
easily
quantifiable,
appraisal for corporate loans were
carefully studied. Also credit are carefully weighed
a
appraisals done at other leading before
recommendation
or
organizations were taken into
rating is proposed by
consideration.
research
team
Both
quantitative
and the
responsible
for
the
qualitative aspects need to be
analysis.
The
final
taken into consideration while
recommendation
or
computing the risk levels.
rating
is
assigned,
only
The risk assessment of a
particular debt issue of a largeafter the findings, both
365

quantitative
and
qualitative, and the
proposal of the research
team
have
been
discussed in a top level
committee.
Schematically,
the
process is presented in
figure 4.1. It
is
interesting to see all the
things
that
are
considered, and the
hierarchy assigned to
each, in order to arrive
at a rating and that
qualitative analysis is
placed at the very top
of the pyramid.
Figure 4.1 Standard
Considerations in the Rating
Process

Source:
www.v3.moodys.com

International Journal of Innovation, Management and Technology, Vol. 1, No. 4, October 2010
ISSN: 2010-0248

from a downturn or
B. Credit Scoring
recession.
Also
Methodology for
industries,
being
cyclical
in
nature
Manufacturing
appear to suffer more
Companies
A good scorecard should severely from adverse
consider a number of financial and economic
non financial parameters of the shocks/conditions.
competition
enterprise and the impact of the Further
risk
coupled
with
macro economic factors like
technological
level
of
government policies, trade polices
competition
in
the
and regulations and the industry
industry would define
specific dynamics.
The industry in which a the bargaining power
company operates has a direct of its players, the
bearing
on
the
overall intensity of margin
and
the
performance of the company and pressures
of
therefore, the company should be degree
rated
based
on
industry competitiveness
required
for
the
benchmarks.
Further the dynamics or the risk business to exist in the
run.
Further
factors affecting a small company,long
a medium size job manufacturer or Government policies
a large manufacturer are different play a major role in
the
and hence the size of the firm determining
outlook
of
the
industry.
should be considered.
The rating framework includes the D. Business Risk
following risks:
Business risk is the
1 Industry Risk
possibility of a credit
2 Business Risk
customers failing to
3 Management Risk
pay
because
of
4 Financial Risk
circumstances
connected with the
C. Industry Risk
customers
business
The industry in which an
activities
and
enterprise operates plays a crucial
management. Business
role in the credit risk assessment.
risk can impact a
It is a key determinant of the level
company
at
the
and volatility in earnings of any
enterprise,
business
business. Other factors remaining
unit
or
business
the same, industry risk determines
process level. The
the ratings. Some of the factors
elements of business
that are analyzed include:
risks can be identified
1 Demand Factors
under the broad heads
2 State of Competition
of market risk and
3 Environmental Factors
operational efficiency
4 Bargaining Power of suppliers risk.
The industry risk also considers 1) Market Risk
economic risk arising from Market risk is the
economic
instability,
and exposure of the unit
depressed
or
deteriorating to the forward and
economic conditions within a
country. Decline in a countrys
economy, or in one of its
particular industries, should arise
concerns about whether to grant
credit to customers in that sector,
or if so, whether to limit the credit
exposure to that sector/ industry.
The risks of industry exposure are
likely to be greatest when the
domestic economy is suffering

backward linkage in
the
course
of
conducting
its
business, and the risk
of facing sustained
periods of unfavorable
trends in such factors
as product prices, raw
material prices, single
product
dependence,
pricing
inflexibility,
etc.
The
important
factors
should
be
considered
for
assessing market risk
are:
1 Positioning of the
products (Luxury
Vs Necessity)
2 Distribution
Network (Owned
or Rented)
3 Relationship with
Customers ( Fixed
orders, Number of
Customers)
4 Product
Range
(Single
Vs
Multiple)
2) Operational
Efficiency Risk
In markets where
competitiveness
is
largely determined by
costs,
the
market
position is determined
by
the
units
operational efficiency.
The result of these
factors is reflected in
the ability of the unit to
maintain /improve its
market
share
and
command differential
in pricing. In a
competitive market, it
is critical for any
business unit to control
its costs at all levels.
This assumes greater
importance
in
commodity or "me too
" businesses, where
low cost producers
almost always have an
edge.
Cost
of
production to a large
extent is influenced by
Location
of
the
production
unit(s),
Access
to
raw

materials, Access to Humanmargin.

Resources, Scale of operations,G. Access to Human
technology, Level of integration,resources
Experience and the ability of the
Employees and their
unit to efficiently use its resources.
experience
play a
E. Location of the production unit crucial
role.
Location of the production units Enterprises which have
plays an important role. An better access to skilled
enterprise which is situated inemployees
and
close vicinity of their suppliers / professional
customers or is situated in a tax management with good
free zone has a better control over employee
benefit
cost than units which are located policies
and
low
at remote areas.
turnover of employees
has better margin.
F. Access to raw materials
Enterprises with easy proximityH. Scale of operations
to raw material sourcing and Adequate
having better bargaining termsinfrastructure facilities
with suppliers have betterelectricity, water, fuel
margins. Availability of qualityetc coupled with good
raw material at reasonable price in quality of machines
close proximity prima facie resultsand manpower can
in lower costs and better operating
366

result in optimum
utilization of resources.
I. Technology
Technological risk is
the threat that new
product / service or
inventions poses a
challenge to existing
product
/
service
whereby demand for
existing product will
either reduce or be
eliminated.
Two
primary sources of
technological risk are
rate of obsolescence
and
difficulties
associate with adoption
which
primarily
involves higher cost,
and
may
face
incompatibility
problem.

International Journal of Innovation, Management and Technology, Vol. 1, No. 4, October 2010
ISSN: 2010-0248

better understanding of
J. Management Risk
the influence of all the
Management risk refers to the business and financial
instance of risk of non payment risk factors. Evaluation
arising out of a business failure of the existing financial
is
also
due to the perceived inefficacies position
for
of the management. The elements important
the
in management risk are assessing determining
the management quality judged on sources of secondary
the basis of the basic educational cash flows and claims
qualification,
professional that may have to be
experience of the entrepreneur; serviced in future.
and business attitude that is related L. Indicators of
to the motivation of carrying out Financial
the business and pursuing business Performance:
strategies.
Financial
Character relate to theindicators over the last
willingness to pay. Apart from thethree
years
are
characteristic
disposition
of analyzed
and
honesty and integrity, several performance of the
aspects are judge in terms of
enterprise is compared
1. Track record of previouswith
its
peers.
borrowing and payment is an Comparison with peers
indicator.
is important for better
2. Whether
the
owners/ understanding of the
directors have a financial interest industry trends and
determining
the
in the business.
Ability relates basically the relative position of the
ability to pay. Credit worthiness ofissuer. Some of the
the entity is assessed, including its important
indicators
financial strength.
that are analyzed are
Capacity refers to thepresented below:
borrower
having
technical,1 Gross
profit
managerial and financial abilities
margin
in order to operate profitably and2 Operating profit
succeed in business.
3 Net profit margin
Past
experience
of
the
4 Return on capital
management in handling similar
employed
business, performance of group
5 Return on net
companies and their track record,
worth
vision and mission of the
6
Total debt as a %
management,
organization
of tangible net
structure, succession issues, net
worth
worth and corporate governance
7
Long term debt as
also plays an important role in
a % of tangible net
assessing the management.
worth
K. Financial Risk
8 Total
outside
Financial
risk
analysis
liabilities as a % of
tangible
total
involves thorough evaluation of
assets
the financials of the companies.
Careful analysis of the audited9 Interest coverage
ratio
financials,
observations
of
auditors in the auditors report and
notes to accounts, consistent
treatment of financials play an
important role.
While the focus of rating
exercise is to be determined the
future cash flow adequacy for
servicing debt obligations, a
detailed review of the past
financial statements is critical for

1 Debt
2
3

service
coverage ratio
Current Ratio
Quick Ratio

M. Developing a
Credit Scoring
Model Specific for
Auto Ancillary
Industry
As the model was
developed to classify the
applicants from Auto
Ancillary Industry, the
risk factors applicable
only to the auto ancillary
units were taken into
consideration.

There
were
28
factors in total, taken
for developing the
model.
The
list
includes
both
the
qualitative
and
quantitative factors.
The factors were:
1 Years of existence
of the company
2 Location of the
company
3 Group to which
the
company
belongs
4 Distribution
network
5 Relationship with
customers
6 Product range
7 Location of the
production units
8 Access to human
resources
9 Technology
10 Track record of
management
11 Operating profit
12 Share capital
13 Current ratio
14 Quick ratio
15 D/E ratio
16 Interest coverage
ratio
17 Inventory turnover
ratio
18 Debtors turnover
ratio
19 Fixed
assets
turnover ratio
20 Working capital
turnover ratio
21 Return on capital

employed

Chennai,

Bangalore,

Mumbai, Hyderabad,
22 PAT/Net sales
Pune,
Delhi,
and
23 PAT as % of Total Assets
Kolkata.
This
is
mainly
24 PAT/Net worth
to ensure a better
25 Growth in Sales
quality of service and
26 Growth in Profitability
ease in collection of
27 Net working capital
rentals.
However,
28 Working capital as % of total leases
are
also
asset
extended
at
other
Years of Existence of the centres to where there
company: The data value is the are no branches.
actual number of years of Values: 2 = The
existence.
NBFCSs comfortcompany is located in
levels are better with firms with favorable places, 1 =
longer establishment.
The Company is in
Location of the company:non-branch locations
NBFCS mainly
leases
to Group to which the
companies located in the cities company
belongs:
367

NBFCS favors wellestablished

promoters
and
hence
gives
preference
to
the
companies belonging to
major groups and the
companies with which
NBFCS has had a long
term relationship as
well.

Values:
3
=
Company has had a
long term relationship
with NBFCS, 2 =
Company belongs to a
wellestablished
group, 1 = Company
does not belong to any
major group

International Journal of Innovation, Management and Technology, Vol. 1, No. 4, October 2010
ISSN: 2010-0248

performance.
Distribution network: A well Share
Capital:
established distribution network Authorized
share
which is owned by a company is a capital is the total
clear indicator of capacity of its amount
of
shares
business.
available to be issued.
Values: 2 = Rented distribution Issued share capital
network, 1 = Owned distribution relates to the total
network
amount
of
shares
Relationship with customers:actually subscribed for.
This
factor
measures
the Current Ratio: It is
companys relationship with itsthe ratio of the current
customers in terms of number ofassets to the current
customers, performance of theliabilities and measures
customers in the industry, andthe ability of the firm
number of fixed orders.
to meet its current
Values: 2 = Good customers liabilities. The higher
with fixed orders, 1 = No fixed the ratio, greater the
orders
short term liquidity. .
Product
range:
Risk Quick Ratio: Quick
associated with a company that ratio measures how
manufactures only one product is much of the short term
higher than that of a company that and current liabilities
manufactures multiples products. and provisions are
Values: 1 = Single product, 2 = covered by the highly
Multiple product
liquid current assets.
Location of the production Inventories are not
units: When a company has included
in
its
productions units which are close calculation as they are
to suppliers and markets, the deemed to be the least
operating efficiency of the liquid component of
company goes up.
current assets.
Values: 2 = Multiple and
Debt/Equity Ratio:
favorable locations, 1 =
This ratio is very
Unfavorable locations
important ratio to
Access to human resources:
judge effectiveness of
This factor measures
the long term financial
the employee turnover rate.
policy of the business.
Values: 2 = Low
It is the relationship
turnover rate, 1 = High between the external
turnover
and internal liabilities
rate
of a concern.
Technology:
This
factor
Interest Coverage
measures if the company is
Ratio:
This
ratio
adapting
to
the
recent
measures the number
advancements in technology.
of times the fixed
2 = New technologies used, 1 =
interest
charge
is
Old technologies used
covered by the periodic
Track record of management:
profit. It is always
Track record of management is a
desirable to have profit
qualitative factor and is crucial in
more than interest
building credit scoring model.
payable.
Track record of management
Inventory Turnover
includes the years of experience
Ratio: It establishes the
of the entrepreneur, education,
previous experience in the relationship between the
industry,
strength
of
core cost of goods sold
during the year and
management group, etc.
Values: 3 = Good, 2 = Average, average
1 = Poor Operating Income: It
is the top- line of the company.
Higher the value of operating
income, the better the firms

stock kept during that

year and average stock
kept during that year. It
indicates
how
efficiently stock is
being sold in business.
It shows the speed with
which stock is rotated
into sales. It shows
efficiency
and
performance of the
inventory management.
Debtors Turnover
Ratio: This ratio is
known as receivables
turnover
ratio.
It
establishes the relation
between credit sales
and average debtors on
which
basis,
the
efficiency of debtor
collections can be
ascertained.
Fixed
Asset
Turnover Ratio: In
manufacturing
concerns,
where
production
activities
and volume of sales
depends on fixed assets
and the investment in
fixed assets is quiet
high, this ratio is used
to
ascertain
how
efficiently the fixed
assets
are
being
utilized.
Working
Capital
Turnover Ratio: It is
nothing
but
a
measurement comparing
the depletion of working
capital
with
the
generation of sales over
a given period. This is a
good
indicator
of
companys growth and
liquidity. Dividing the
net sales by the average
working capital derives
the ratio.

Return on Capital
Employed:
A
commonly used rate of
return measure, the
return
on
Capital
Employed (also called
as return on total assets
or
Return
on
Investment) is defined
as the ratio of Net
Income (profit) to
average Total Assets.

PAT/ Net Sales: It shows thecurrent assets and

earning left for the shareholders ascurrent liabilities being
a percentage of the net sales andavailable to run the
measures the overall efficiency ofday- to- day activities
production,
administration,of a business.
selling, financing, pricing and tax WC as % of Total
management.
Asset: This is the Net
PAT as % of Total Assets: ThisWorking Capital ratio.
ratio measures the efficiency ofThe working capital is
the firm in utilizing its total assetsthe difference between
for generating the net profit.
the current assets and
PAT/Net Worth: This ratio is athe current liabilities.
Collection:
measure of how efficiently the Data
firms capital is employed.
Once the variables
Growth in Sales:This factorwere identified, the
represents the growth in the salesvalues of each variable
from the previous years figures.for the 70 cases were
For the analysis the figures for last taken
from
the
5 years have been taken.
companys
records.
Growth in Profitability: ThisThe recent financials
factor represents the growth in thewere
taken
from
profit after tax from the previousclients annual reports.
years figures. For the analysis theOnly the secondary
figures for last 5 years have beendata were collected to
taken.
build the model.
Net
Working
Capital
N. Initial
Required: The difference between
368

Classification of
Applicants
The
variables
discussed
in
the
previous section were
treated as independent
variables with Risk
Level being treated as
dependent variable and
a model was built.
The
dependent
variable Risk Level
could take three values.
This data is of nominal
type.
The values are:
1 = Low Risk, 2 =
Moderate Risk, 3
= High Risk
The
initial
classification
of
companies based on
the risk level was done
using existing data
with the company. Out
of

International Journal of Innovation, Management and Technology, Vol. 1, No. 4, October 2010
ISSN: 2010-0248

be used to predict the

70 cases taken, 50 cases group membership. In

considered for building the model case of three groups,
and remaining 20 companies were each object will have
used for validating the model. two
different
scores
Multiple discriminant analysis was discriminant
carried out in order and obtained using two
discriminant
functions
were functions, allowing the
obtained. The coefficients ofobjects to be plotted in
independent variables provide the two dimensions, with
dimension
significance of each factor in each
representing
a
making lending decisions.
discriminant

function.

O. Statistical Tool Multiple

Then,
the
distance
Discriminant Analysis
between
the
group
The main purpose of a centroids
and
the
discriminant analysis is to predict discriminant scores is
group membership based on acalculated. The shortest
linear combination of the interval distance determines the
variables. The procedure begins group membership.
with a set of observations where There are several
both group membership and the purposes for DA
values of the interval variables are and/or MDA:
known. The end result of the
1 To classify cases
procedure is a model that allows
into groups using a
prediction of group membership
discriminant
when only the interval variables
prediction
are known. A second purpose of
equation.
discriminant analysis is an2 To test theory by
understanding of the data set, as a
observing whether
careful examination of the
cases
are
prediction model that results from
classified
as
the procedure can give insight into
predicted.
the relationship between group3 To
investigate
membership and the variables
differences
used to predict group membership.
between or among
Multiple discriminant analysis
groups.
(MDA) is an extension of4 To determine the
discriminant analysis and an
most parsimonious
extension of multiple analysis of
way to distinguish
variance (MANOVA), sharing
among groups.
many of the same assumptions and5 To determine the
tests. MDA is used to classify a
percent of variance
categorical dependent which has
in the dependent
more than two categories, using as
variable explained
predictors a number of interval or
by
the
dummy independent variables.
independents.
MDA is sometimes also called6 To determine the
discriminant factor analysis or
percent of variance
canonical discriminant analysis.
in the dependent
MDA is unique in one
variable explained
by
the
characteristic
among
the
independents
over
dependence
relationship
of
and above the
interest. If there are more than two
variance accounted
groups in the dependent variable,
for by control
discriminant
analysis
will
variables,
using
calculate
more
than
one
sequential
discriminant function.
discriminant
As a matter of fact, it will
analysis.
calculate N 1 functions, where N
7
To assess the
is the number of groups. Each
relative
discriminant function will give a
importance of the
discriminant score. This score can
independent

variables
in
classifying
the
dependent
variable.
To
discard
variables
which
are little related to
group distinctions.

1 To infer the meaning of MDAvariables are as

dimensions which distinguish follows:

groups based on discriminant The dependent
variable (Y) is the Risk
loadings.
Level. (Low, Moderate,
P. Discriminant Function
High)
Y = a + WlXl + WlX2 +. +
The independent
variables are:
WnXn
Where
1 Years of existence
Y
of the company
2 Location of the
company
3 Group to which
D
the
company
e
belongs
p
4 Distribution
e
network
n
5 Relationship with
d
customers
e
6
Product range
n
7 Location of the
t
production units
8
Access to human
v
resources
a
9 Technology
r
10 Track record of
i
management
a
b
11 Operating profit
l
12 Share capital
e
13 Current ratio
14 Quick ratio
a
15 D/E ratio
16 Interest coverage
ratio
17 Inventory turnover
C
ratio
o
18
Debtors turnover
n
ratio
s
t
19 Fixed
assets
a
turnover ratio
n
20 Working capital
t
turnover ratio
Xl, X2, Xn - Independent
21 Return on capital
variables
employed
Wl, W2, Wn - Coefficients of 22 PAT/Net sales
the independent variables In
this case, for the development 23 PAT as % of Total
of the model the
Assets
dependent and independent
24 PAT/Net worth
369

25 Growth in Sales
26 Growth
in
Profitability
working
capital
28 Working capital as
% of total asset

27 Net

V. DATA
ANALYSIS AND
INTERPRETATIO
N

Total number of
cases taken for the
analysis was 70. Out of
these 70 cases, 50 were
considered for building
the model and 20 were
used for validation.
Discriminant Analysis
was
performed
to
obtain a function that
discriminates
the
applicants
(Lessees)
into
three
riskcategories, low risk,
moderate risk, and high
risk.
The
values
of
independent
and
dependent variables of
50 cases taken for
building the model
were used as the inputs
and the discriminant
functions
were
obtained. As mentioned
earlier,
two
discriminant functions
would be derived as
there
were
three
groups. Later, the
values of another 20
cases were added to
validate the model.
A. Case Processing
Summary
Case Processing
Summary is to find
out if all the cases are

International Journal of Innovation, Management and Technology, Vol. 1, No. 4, October 2010
ISSN: 2010-0248

included in the analysis. Analysiseigenvector in the

Case Processing Summary isdirection that has the
next largest spread, and
depicted in table 5.1.
TABLE 5.1 ANALYSIS CASE
so on. The square root
PROCESSING SUMMARY
of each Eigen value
provides an indication
of the length of the
corresponding
eigenvector.
TAB
LE

5.3
EIGE
N

VAL
UES

Interpretation: The table no.

5.1 indicates that all the 70
companies were included to build
and validate the model and none
of the cases lies out of range.
Test of Equality of GroupInterpretation
Means: Test of equality of group Table 5.3 shows the
means
explains
how
theEigen value for the
characteristics of cases from samediscriminant function 1
group differ from that of casesis the highest. Hence,
the first discriminant
from other groups.
TABLE 5.2 TEST OF EQUALITY function discriminates
OF GROUP MEANS
more applicants than
Wilks
lambda
for
the variable
Years
of
Existence is
1
which
indicates the
years
of
existence
cannot
be
considered a
crucial factor
to classify the
applicants.
If
the
significance
Interpretation: value is small
Table 5.2 gives the(smaller than
values of Wilkssay, 0.10) this
lambda, F statistic,indicates that
and significance ofthe
group
each variable. Wilks'differences
lambda is the ratio ofare
the
within-groupssignificant. If
sum of squares to thethe
total sum of squares.significance
Wilks' lambda rangesvalue is large
from 0 to 1.0. Small(larger than
values indicate strongsay, 0.10) this
group differences. Aindicates that
value of 1 indicatesthe
group
no group differences. differences
In this model,

the second function.

The
canonical
correlation measures
the association between
the discriminant scores
and the groups. Values
close to 1 indicate a
strong
correlation
between
the
discriminant scores and
the groups. Table 3.3
shows
the
first
discriminant function is
strongly
correlated
with
the
groups
measures
as
the
canonical correlation is
0.892.

are
notis the ratio of
significant. the betweenFrom thegroups sum
table 5.2, itof squares to
can
bethe withininferred thatgroups sum
there
areof
squares.
strong groupThe largest
differences Eigen value
for the factorscorresponds
Group
toto
the
which
theeigenvector
company
in
the
belongs,
direction of
Relationship the maximum
with
spread of the
customers, groups
Location ofmeans.
the
The
productions
second
units, Product largest
range,
D/E Eigen
ratio, Return value
on
capital correspond
s to the
employed,
PAT/Net
sales,
and
Growth
in
profit.
Eigen
Values: The
Eigen value

B. WILKS
LAMBDA
Wilks'
lambda is the
proportion of
the
total
variance
in
the
discriminant
scores
not
explained by
differences
among
the
groups.
Wilks'
lambda
ranges
between
0
and 1. Values
close to 0
indicate the
group means
are different.
Values
close to 1
indicate the
group means
are
not
different
(equal to 1
indicates all
means are the

same).
not differ.
would
bemeasured in
TABLE
A
chi-square
more helpfuldifferent
5.4
transformation
of
units,
the
on
WILKS
Wilks' lambda is used
magnitude
of
classification

LAMBas
along
with
the
an
the
DA
degrees of freedom to
significance unstandardize
determine
value
ared coefficient
significance. If the
provides little
0.032.
significance value is
Standardi indication of
small (less than say
the relative
zed
0.10) this indicates
Discrimin contribution
that group means Interpreta
ant
of
the
differ.
If
thetion:
Function variable
Table
to
Coefficient the
significance value is5.4
shows
overall
s:
large (more than saythat the first
discriminatio
When
0.10) this indicatesdiscriminant
n.
variables are
that group means dofunction
370

Standardizing
the
coefficients
allows us to
examine the
relative
standing of
the
measurement
s. Table 5.5
shows
the
standardized
canonical
discriminant
function
coefficients.

International Journal of Innovation, Management and Technology, Vol. 1, No. 4, October 2010
ISSN: 2010-0248
TABLE 5.5 STANDARDIZED CANONICAL DISCRIMINANT FUNCTION TABLE 5.6 CANONICAL DISCRIMINANT FUNCTION COEFFICIENTS COEFFICIENTS

being a member of the

group if the distance
between the score at
centroid of that group and
the actual discriminant
score of the case is the
shortest.
D. Canonical
Discriminant Function
Coefficients
Canonical
discriminant
function
coefficients are used to
derive the discriminant
score for each case.

Interpretation
From the table 5.5 it can be concluded
that the financial factors such as Operating
Profit, Quick Ratio, Interest Coverage
Ratio, Working Capital Turnover Ratio,
Inventory Turnover Ratio, and Net Working
Capital shall be considered significant in
classifying the applicants.

Apart from financial factors, nonfinancial factors such as Track Record of

Management, The Group of the
Company, Product Range, Access to
Human Resources, and Relationship with
Customers shall be given more importance
while rating a client.
C. Territorial Map Plot
Territorial map plot shows the relative
location of the boundaries of the different
categories. The territorial map is shown in
figure 5.1.
Figure 5.1 Territorial Map

Interpretation
The territorial map is drawn with the
first discriminant function representing the x
axis and the second discriminant function
representing the y axis.
The discriminant score of each case is
plotted in the territorial map. Also the
discriminant scores at the centroid of each
group are plotted. A case is predicted as

Interpretation
These coefficients give
the exact weightage of
each variable to arrive at
discriminant scores.
E. Discriminant
Functions

1 A

discriminant
function, also called
a canonical root, is a
latent variable which
is created as a linear
combination
of
discriminating
(independent)
variables.
2 There
is
one
discriminant function
for
2-group
discriminant
analysis, but for
higher
order
discriminant
Analysis, the number
of functions is (g 1), where g is the
number of categories
in
the
grouping
variable.
3 The first function
will be the most
powerful
differentiating
dimension, but later
functions may also
represent additional
significant
dimensions
of
differentiation.
Discriminant Function 1
Y = - 0.031 *
Existence - 0.657 *
Location + 0.124 * Group 0.112
*
Distribution
Network - 0.227 *
Relationship
with
Customers - 0.175 *

Product Range - 0.094 * Location ofCapital

+ 0.009 *
Production Units + 0.048 * HR - 0.002 * Working Capital as % of
Technology + 0.395 * Track Record ofTotal Asset 3.033
Management + 0.001 * Operating Profit - Discriminant Function 2
0.007 * Share Capital - 0.095 * Current Ratio Y = - 0.008 * Existence 0.330 * Location +
+ 0.637
1*
Quick Ratio - 0.350 * D/E Ratio + 0.168 * Group
- 0.593 * Distribution
0.001 * Inventory Coverage Ratio + 0.064 *
Network + 0.013 *
Inventory Turnover Ratio + 0.248
Relationship
with
2*
Debtors Turnover Ratio - 0.203 *
Customers + 1.549 *
Fixed Assets Turnover Ratio + 0.032 * Product Range - 1.261 *
Working capital turnover Ratio + 0.106 * Location of Production
Return on capital employed + 0.003 * PAT/Net Units + 0.281 * HR - 1.247
Sales + 0.005
* Technology 0.445*
3*
PAT/Total Asset + 0.050 * PAT/Net Track
Record
of
worth - 0.001 * Growth in Sales + 0.000 * Management + 0.001 *
Growth in Profit + 0.001 * Net Working Operating Profit + 0.020 *

371

Share Capital - 0.177 *

Current Ratio - 0.555

1*

Quick Ratio 0.757 * D/E Ratio + 0.000

* Inventory Coverage
Ratio + 0.027 * Inventory
Turnover Ratio - 0.144 *
Debtors Turnover Ratio +
0.087 * Fixed Assets
Turnover Ratio + 0.013 *
Working capital turnover
Ratio - 0.119 * Return on
capital employed - 0.061 *
PAT/Net Sales + 0.209

2*

PAT/Total Asset
+ 0.045 * PAT/Net
worth - 0.010 *

International Journal of Innovation, Management and Technology, Vol. 1, No. 4, October 2010
ISSN: 2010-0248

Growth in Sales - 0.003 * Growth

in Profit - 0.001 * Net Working
Capital + 0.042 * Working Capital Interpretation
Table 5.8 depicts the
as % of Total Asset + 2.947
degree of success of the

F. Discriminant Score
classification for this
The discriminant score, alsosample. Overall 88.0 %
called the Discriminant Analysis
of selected cases (i.e.,
score, is the value resulting from
the cases used for
applying a discriminant function
building the model)
formula to the data for a given
were
correctly
case.
classified.
Classification Function
G. Validation of the
Coefficients
The classification function Model
coefficients can also be used to For checking the
predict the group membership.
consistency
of
TABLE 5.7 CLASSIFICATION
performance of the
FUNCTION COEFFICIENTS
model, twenty four
existing clients were
considered and rated.
The comparison of the
rating of the customer
and the current status
of the performance
determines
the
consistency of the
model. Table 5.9 shows
the validation results.
TABLE
5.9
VALIDA
TION

RESULTS

Interpretation
column
contains
estimates of the coefficients
for a classification function
for one group.
2 The functions are used to
assign or classify cases into
groups.
3 To obtain a classification
score for each case for each
group,
multiply
each
coefficient by the value of the
corresponding variable, sum
the products, and add the
constant to get the score.
4 A case is predicted as being a
member of the group in
which the value of its
classification function is
largest.
Classification of Applicants

1 Each

Interpretation
20 cases which were
not included in the
model building were
used for the validation
for
model.
The
accuracy
of
classification is 90%.
Hence, the model is
highly reliable.
VI. FINDINGS
AND
SUGGESTIONSKEY
FINDINGS
28 factors (Financial
and
Non-financial)
were considered for
building the model and
the
classification
accuracy produced by
the model was 90%.
The factors cannot
be given equal weights.
The level of impact of
each
factor
in
predicting the risk
category
of
an
applicant differs.
Among the financial
factors considered for
building the model,
Operating
Profit,
Quick Ratio, Interest
Coverage
Ratio,
Working
Capital
Turnover
Ratio,
Inventory
Turnover
Ratio,
and
Net
Working Capital shall
be
considered
significant
in
classifying
the
applicants.
Apart from financial
factors, non-financial
factors such as Track
Record
of
Management,
The
Group
of
the
Company,
Product
Range, Access to
Human
Resources,
and Relationship with

Customers play a crucial role in Range, Access to

defining the risk category of anHuman
Resources,
applicant.
and Relationship with
Customers shall be
VII.
given more importance
SUGGESTIONS while
rating
an
90% of the cases were classified applicant.
correctly based on the known
VI
information about the groups.
II.
Hence, the model is highly
CO
reliable.
NC
The model involves only 28
LU
SIO
variables, and with a 90%
N
accuracy in classification, this
could be an initial-screening-tool The growing number
to assess the creditworthiness ofof insolvencies of
calls
for
the applicants. The new modelbusiness
reliable
procedures
to
would also help the credit officers
evaluate
credit
risk.
A
to simplify and standardize the
model
was
thus
credit rating process.
to
The model concludes that thedeveloped
objectively
determine
qualitative factors like Track
Record of Management, Thethe credit risk by using
Group of the Company, ProductMultiple Discriminant
372

Analysis. The model

developed must be
considered as a tool for
the credit analyst and is
not intended to replace
a
time-tested
comprehensive credit
appraisal method being
followed
by
the
company. The best use
of this model is as a
filter to identify
companies
requiring
further review or to
establish a trend for a
company
over
a
number of years. The
new model can be finetuned
further
by
including
additional
relevant factors, which
could be an effective
supporting tool in
measuring the

International Journal of Innovation, Management and Technology, Vol. 1, No. 4, October 2010
ISSN: 2010-0248

creditworthiness of the lease applicants.

REFERENCES

[1]

Lyn C. Thomas, David B. Edelman, Jonathan N. Crook. (2000).

Credit Scoring and Its Applications Cambridge University Press

[2]

David J. Hand, Saul D. Jacka (1998) Statistics in Finance Hodder

Headline Group

[3]

Richard A. Johnson, Dean W. Wichern (2002) Applied Multivariate

Statistical Analysis Pearson Education Inc

373