More idiot-proof credit packages from Moody’s

Apart from standardising the quality of loan appraisal across a bank, what this package does, is to ensure that very little time is spent on appraising credit proposals from good companies or on projects with relatively little credit risk. Banks are then free to devote more analysis to relatively more complex projects.

More important, the software will raise certain questions, or red flags, which need to be watched carefully in the future. What’s better, these questions, arising from the analysis of the data, will be in simple English, so that any credit officer can understand and then act upon them. `The firm’s sales increase is too sharp, and the reason for this needs to be understood’, for instance, will alert the credit officer to perhaps look into the role of technology changes in the industry. The answers got by the credit officer to the queries posed by the package, are then fed into the projections module.

The package also helps bankers to restructure credit proposals to make them less risky. Let’s say, for instance, that you’re lending to a firm which has no track record, or for a totally new kind of venture like, say, a software producer. Since much of the capital of the firm depends either on intellectual capital of the people who work there, clearly old forms of collateral-based loans are not possible. It is then possible to secure the loans against future receivables, and the package will help fix what the cash-flow and other targets will be for the firm. So, let’s say that the banks loans are safe if cash inflows grow at 25 per cent per month — this then also becomes a red flag, and if cash inflows don’t grow so fast, the bank gets alerted to the fact that there’s a problem.

Internationally, the package has been tested on around 21,000 companies, to see if the analyses generated is accurate. In India, ICRA has already run in on data for 200 companies, to check its accuracy.

Till a few days ago, Moody’s had a 40 per cent share in the market of risk assesment packages. With its recent takeover, this has now gone up to 75 per cent.