CREDIT RISK ANALYSIS

Magan Jugurnauth

IN RESPECT TO LEASING

Definition of Risk

A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action.

Risk - Is Uncertainty

It is a study of the underlying uncertainty of any given course of action.

What is Risk Analysis?

Risk analysis also refers to measuring and detecting probability of an occurrence of undesirable event say in cash flow streams, portfolio returns, or project at a given point. In the banking industry, Credit Risk Analysis is a crucial skill for Credit Risk Management.

Credit Risk Management is aimed at measuring, quantifying and pricing of the above risks in making any credit decision.

We have two kinds Risk

1. 1. Expected Risk

1. 2. Unexpected Risk

Credit Risk Manager use various risk analysis methods to predict or measure future negative or positive unforeseen effects in a given environment.

Risk is measured using either qualitative or quantitative methods or both.Qualitative Credit Risk Analysis employs the use of historical accounting data like Financial Statements, Bank Statements and Payment History.Quantitative Credit Risk Analysis extends further to the usage of industry information and other macro-economic triggers.SUBJECTIVE measurement: Gut feeling.

Risks in the leasing industry do not only belong to the Lessor but also to the Lessee.

LEASING AND ITS CREDIT RISKS

Risks to the Lessor

Repayment Risk – delayed repayments and default Suitability and Collateral Value of a leased asset. Suppliers Credibility – Pricing of assets and actual

quality Service and Maintenance Risk - Residual Risk – how is the assets secondary market? Obsolescence Risk – Change in technology Damage and accidents – Usage of the asset Theft/Loss of assets Residual Value risks

Risks to the Lessee Asset Performance/Obsolescence – Shall the leased

asset with stand a test of time with current state of technological evolution.

Cash flow risk – Shall the leased asset generate expected cash flows?

Ownership and usage risks – Is security, storage for the leased asset guaranteed. Does the lessee have the technical ability to operate the leased asset?

Environmental Risks – unexpected circumstances like inflation, change in exchange rates, legislation and taxes are all on the account of the lessee.

Industry Risk – Changing Industry dynamics (Telecom Market- data, Camera Market).

Damage and accidents – Usage of the asset impaired

Theft/Loss of assets – Insurable risk

Risks to the Lessee Continued…

ASSET EVALUATION Define clearly assets that can be financed under a lease

agreement- Age, type etc. Relevancy of the assets to be financed to the lessee’s

business Lessee’s stake in the asset - Is it Real or imaginary

(dealer stake Where the leased assets will be located- Movable vs

Imovable

SUPPLIER EVALUATION Evaluation of suppliers and dealers Includes suppliers of services like insurance and

tracking- What type of policies are you taking on?

WHAT TO THINK OF TO MINIMISE CREDIT RISK ON

LEASE FINANCING

LESSEE BUSINESS EVALUATION Lessee’s Actual business Current cash flows – Can they suffice vs repayment

period Expansion, diversification, start up? Level of sophistication of client. Books of accounts and relevant ratios- Historical data

THE BUSINESS THE ASSET

THE SUPPLIER

WHAT TO THINK OF TO MINIMISE CREDIT RISK ON

LEASE FINANCING

Define clearly assets that can be financed under a lease agreement

Evaluation of suppliers and dealers – this includes suppliers of services like insurance and tracking.

Relevancy of the assets to be financed to the lessee’s business

Lessee’s stake in the asset - Is it Real or imaginary (dealer stake

Lessee’s current cash flows – books of accounts and relevant ratios

Where the leased assets will be located Type of insurance to take on the asset- Geog and content Monitoring of the asset/Client –General industry

performance.

WHAT TO THINK OF TO MINIMISE CREDIT RISK ON

LEASE FINANCING

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