2. Best-Practice Data Requirements for Credit Assessment

Types of Data

• Quantitative data: metric values
  
  1. Past/present: actual recorded values
  2. Future: forecasts (eg. cash flow, budget)
• Qualitative data: ordinal values
• External data:
  
  1. Public agencies (e.g. statistics offices providing macroeconomic data)
  2. Commercial data providers
  3. Other data sources (e.g. market prices)

Governments and Public Sector
Central Govenments
Mainly external data sources. The primary source of creditworthiness information is external rating agencies.

Regional Governments, Local Authorities and Public Sector Entities

• Relationship with central government
• Local macroeconomic indicators
• Budget and infrastructure
• Local legal and political circumstances
• Public sector entities: Group interdependencies

Banks and Financial Institutions
Credit Institutions

• Financial statements
• Cash flow forecasts
• Risk structure and risk management
• Business policies' ability to generate future revenue
• External information (rating, stock price, other published information)

Insurance Companies
Although the risk structure is different from that of credit institutions the same data categories apply.

Financial Institutions
Can be very similar to credit institutions. The actual data requirements depend on the risk profile of the organization, which in turn depends on the business model (e.g. asset management firm vs. bank)

Corporate borrowers
This segment can be further subdivided as follows:

1. Large corporate / public companies
2. Other corporate
3. Small business (no financial reporting)
4. Start-up companies
5. Non-profit organizations

Large corporate
Quantitative data:

• Financial statements
• Reported cash flow forecasts

Qualitative data:

• Assessment of reliability of such forecasts
• Quality of management
• Industry rating
• Competitive position per business area
• Output market and products per business area

External data:

• External rating
• Stock prices

Other corporate
Quantitative data:

• Financial statements
• Debt service capacity
• Bank account activity: long-term overdrafts and debt/credit balances and trends

Qualitative data:

• Management
• Industry rating
• Competitive position in the reference market
• Business strategy

Small business and professionals
Simplified credit rating model:

• income and expense accounts
• forward-looking estimate of debt service capacity
• quality of business owner/professional

External data:

• consumer loans register (business owner/professional)

Start-ups (pre-launch)
Only qualitative data is available.

• Business idea
• Market opportunities
• Industry rating

External data:

• consumer loans register (founders)

Start-ups (post-launch)
Quantitative data as available:

• Financial statements / income and expense accounts
• Bank account activity data
• Liquidity and revenue streams
• Business plan

Non profit organizations (NPOs)>
Quantitative data:

• Annual financial statements
• Balance sheet interpreted differently
• Debt service capacity

External data: legal and political circumstances

Retail customers (private individuals)
Basel II defines SMEs as retail customers, yet the information bases for estimating creditworthiness is different for individuals and for SMEs. Here we discuss loans to private individuals; whereas, SMEs have been discussed earlier.

Subsegments:

• Mass-market banking
• Private banking: high net worth retail customers