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					SBC BRR User Guide
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BRR system of SBC, a User Guide

Rationale and Overview

Risk is inherent in the function and occupation of financial institutions, and there are
three main categories of risk (credit risk, market risks, and liquidity risks) which the
institution would be concerned with. Among these risks, credit risk would be of most
interest because it concerns the risk associated with its main activity which is

Among the tools and instruments being used to help control credit risk is a Borrower
Risk Rating System (BRR) which will help management identify and mitigate the
areas of risk involved in extending financing to its SME- clientele.

As envisioned, the BRR will effectively screen out bad accounts and help identify the
level of risk of potentially problematic accounts. It will also help fast track the
processing of accounts with minimal risks involved. Each borrower would be risk rated
and each loan would be managed and priced according to the risk level.

To ensure the efficient and reliable use of the BRR system, and the risk rating of each
borrower, a clear set of guidelines on the process of risk rating borrowers, the
interpretation of its results and the focal areas where risk could be mitigated is hereby
promulgated and institutionalized.


          The objectives of the BRR system are as follows:

          1.         Provide a system of credit analysis both quantitative and qualitative to
                     provide a basis for management to approve or deny credit applications.

          2.         Come up with a borrower risk rating wherein each borrower is given a
                     credit risk estimate and description.

          3.         Identify areas of risks in accounts and the ways to mitigate risks in these

          4.         Provide for a basis by which the performance of accounts could be

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          5.         Help identify potential problem accounts and institute necessary
                     monitoring measures to manage risks.


The System

The BRR System is a risk rating model that focuses on four areas of concern in an
enterprise. These are: Cash, Administration, Market, and Production. For easy recall,
it may be referred to as the CAMP analysis of an enterprise.

Cash refers to financials of the enterprise and looks into its financial ratios and
balance sheet items specifically: the current ratio, debt to equity ratio, debt servicing
capacity, and the accounts receivable level.

Administration refers to the owners or the management of the enterprise.
Specifically, the factors looked into are: the management experience of the owners in
the line of business engaged by the enterprise, the owner’s health and plan of
succession, the financial capacity of the owners which refers to their personal net
worth, and the attitude of the owners towards banks.

Market looks into the general market condition of the enterprise for its products and/or
services. Specifically, it evaluates the clientele of the enterprise, and the increase in
sales over the last three years.

Finally, Production is concerned mostly in the ability of the enterprise to meet the
demand for the products and services and to expand capacity when needed. Specific
items looked into under this area are: the number of suppliers, the quality and speed
of movement of inventory, potential to increase production and service capacity, and
the quality of the business location.

The model is based on a similar system successfully used to evaluate SMEs in
another developing country in Asia. The criteria used are those which, based on
benchmarked system and the experience of SBGFC, are the most significant and
critical factors in the success of SMEs. Furthermore, these were benchmarked on the
criteria and factors used by partner banks of the corporation engaged in SME lending.

The evaluation used is both quantitative and qualitative using sources of information
that are: 1.) based on financial and operational data of the enterprise, and those 2.)
based on observation, interviews, and personal assessment of the account officer.

The system uses a scorecard (refer to Annex 1, “Borrower Risk Rating Score Card for
Retail Lending”) which contains the selected criteria in each area of concern with their
respective points. The maximum points to be scored in each area of concern are
given and it will be up to the account officer to make the score in each item to be

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evaluated. Maximum points in each area of concern are: Cash, 50 points;
Administration, 20 points; Market, 15 points; and Production, 15 points. All points
in the scorecard are to be added up to make the final score.

The final score is then rated from 1 to 10; 1 being excellent and very low in terms of
risk, and 10 being the lowest with expected loss and very high risk. The passing score
in the model is 55 points which is described as high but acceptable risk. All accounts
rated below the passing mark are to be rejected.

             CONVERSION TABLE: (converting the score to a rating)
                       Risk           Description    Score   Risk quality
                        1         Excellent          > 89    Very low risk
                        2         Strong             80-89   Low risk
                        3         Good               70-79
                                                             Moderate risk
                        4         Fair               60-69
                        5         Acceptable         55-59
                                                             High risk
                        6         Marginal           50-54
                        7         Unsatisfactory     45-49
                        8         Substandard        40-44
                                                             Very high risk
                        9         Doubtful           35-39
                        10        Expected loss      < 35

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  The following are the description of the various ratings:

                    BRR 1
                              BRR score is higher than 89 points. Excellent as a borrower and
                           considered as very low risk quality. Borrowers with this rating are
                           considered as exceptional in terms of risk quality. The repayment of
                           the loans is safe and interest payments are protected by an
                           exceptionally stable margin and principal is secure. BRR 1 borrowers
                           are considered almost as 100% safe.

                    BRR 2
                               Score is between 80-89 points. Strong in terms of credit risk and
                           described as low risk borrowers in terms of risk quality. Those who
                           deserve this rating offer a very high protection for the interests and
                           principal repayments. Their financial structure is very good and their
                           profitability is high for the last five years. They are able to pass
                           through a difficult period and/or recession with no problems.

                    BRR 3
                               Score is 70-79 points and considered good risk quality. They
                           have good financial structure and good repayment capacity. It is
                           profitable for the last five years. Debt repayment is proven within
                           normal activity. They can overcome a temporary instability of the
                           market and the economy. The only concern with this borrower is his
                           ability to sustain a profitable track record if the economy stays in
                           recession and/or if its industry is in a difficult situation for more than
                           three years. The borrower is considered of moderate risk quality.

                    BRR 4
                              Score is 60-69 and considered of Fair or of relatively good risk
                           quality borrower. They have been profitable for the last three years.
                           The cash generated is adequate to ensure debt repayment capacity,
                           but they could suffer from an economic downturn. The borrower
                           respects its obligations and has for the past three years been up to
                           date with the bank. Borrower is of moderate risk quality.

                    BRR 5
                               Score is 55-59 points and considered as acceptable risk. The
                           borrower presents some risks. Interest payments and principal
                           security appear adequate for the present. However, the repayment
                           capacity could be a concern in the long run and/or in recession
                           period. The company has been reasonably profitable for the past two
                           years. The borrower respects his obligations and has for the last
                           three years been up to date with the bank.

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                    BRR 6
                               Score is 50-54 points and described as marginal risk. The
                           borrower is still acceptable but with obvious weaknesses.
                           Repayment capacity is dubious. Historically, profits have been
                           irregular. Loans payments have been up to date for the last year and
                           the borrower is very cooperative. Borrowers of this BRR are
                           considered high risk quality.

                    BRR 7
                               BRR score is 45-49 points and considered unsatisfactory risk.
                           From BRR 7 below, all borrowers are of very high risk quality.
                           Borrowers of this BRR have serious risk of failure on loan
                           repayment. They might not respect their obligations. The future
                           perspectives are not favorable. The cash generated by the company
                           is clearly not sufficient to cover the debt servicing. The survival of the
                           borrower is doubtful. Most of the time they are very late with their
                           suppliers’ payment. A downturn in the economy or in the industry
                           could be fatal. The risk is very high.

                    BRR 8
                              Score is 40-44 and considered substandard in risk quality. Most
                           probably late in loan repayment. It is uncertain or doubtful for the
                           bank to recover the loans granted to these borrowers. The cash
                           generated by the business is unlikely sufficient to cover loans.
                           Collateral realization has to be seriously considered. The future
                           perspectives are likely negative. However, the borrower is still
                           cooperative with the bank and has the desire to turn around the
                           company. Borrowers are very high risk.

                    BRR 9
                               Score is 35-39 and considered doubtful in risk quality. The
                           borrower is clearly in deep trouble. There is no hope for the borrower
                           to turn around the company. They are very close to bankruptcy.
                           There is no hope for the bank to be repaid without realizing the
                           collaterals. The objective of the bank is just to minimize losses.

                    BRR 10
                          Score is less than 35 points. This borrower is bankrupt. And the
                       described as expected loss.

Users of the BRR System

The BRR system is a major requirement in the Credit Review and Approval Process.

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As such, it is used by the various participants in the process namely: the account
officer, head of the business delivery unit, the head of the Credit Review Department,
and the head of the Risk Management Policy Office.

The BRR scorecard is always used and referred to when the account is evaluated---
first by the account officer when preparing the evaluation report and Action
Memorandum, then by his supervisor/manager, usually the head of the business
delivery unit concerned when reviewing the application prior to requesting approval to
the CRD.

During the credit review, the Head of the CRD validates the BRR and checks on the
scores and the assumptions used by the account officer in rating the borrower. In this
instance, the BRR scorecard is the focus of the review. In the same vein, the RMPO
head likewise refers to the BRR when reviewing the application for policy compliance.

At the level of the Crecom, the CRD head when making the presentation focuses on
the risks identified in the account and makes an assessment of its creditworthiness
specifying the mitigating measures and circumstances that would merit the approval
of the application. It is on the basis of the risks involved that the credit terms and
conditions whether regular or extraordinary are imposed.

Likewise, when the system has been further refined, it will allow a computation of the
price for the loan given a certain level of risk in the account.

In the post release phase of the account, the BRR will be the reference point of
monitoring activities.

The level and the kind of risks identified will determine the frequency and the extent of
monitoring activities for a particular account. For example, policy states that accounts
with BRR 1 to 2 will have an annual project visit with a review of the BRR, while BRR
3 to 4 will have the same monitoring activity plus a semi-annual credit investigation
(CI). This policy means the lower the BRR, the more closely the account is to be

Implications and Uses of the Rating

As in the above example, the BRR clearly has an impact on monitoring. However, the
BRR has more extensive implications affecting a wide range of policy decisions and
implications as follows:

The BRR is one of the bases for loan approval. All retail and guarantee accounts are
subject to the BRR. Accounts must pass the BRR 5 which is of acceptable risk. Below
this passing mark means denial of application.

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The BRR is to be reviewed periodically, and shall be the bases for upgrading or
downgrading the risk status of an account. Depending on the risk rating, an account
may be called or restructured if warranted by a very low BRR. On the other hand an
improved BRR will give the account breathing spell in its next loan renewal. It may
result to an increase in the loan amount, lessen the risk mitigating measures, or ease
collateral requirements.

The BRR is used as bases for monitoring activities. The higher the BRR, the less
frequent the monitoring activity; the lower the BRR, the more frequent and stringent
the monitoring activity. Based on the BRR, the following monitoring activities are to be
complied with:

                         BRR                                  Monitoring Activity
                         1 to 2      Conduct of annual project visit with full BRR review1
                         3 to 4      Conduct of annual project visit with BRR review and semi-annual
                                     credit2 investigation (CI)
                            5        Conduct of semi-annual project visit with full BRR review

The BRR is used as reference to set the price, term, and amount of the loan. The risk
level of the enterprise is a function of pricing or the interest rate. Likewise the BRR
has a bearing on the decision to set the term and the amount of the loan.

                              Small Business Corporation
               Borrower Risk Rating Scorecard for Retail Lending Program

    Business Name:
                                Indicators                            Item Mark           Value            Score
    I. Administration
       Experience of owners/management
                                                      >15 years             5
                                                    15> EOM >5              3
                                                       5 > EOM              0
       Owner age, health and succession
           Less than 50 years old, with succession plan                     5

          Less than 50 years old, with no succession plan                   3
            More than 50 years old, with succession plan                    3
              With health concerns, with succession plan                    3

1 Full BRR review includes financial analysis and CI.
2 The CI instrument will be made more comprehensive to also tackle financial performance of the business; new CI format for
this to be developed.

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        More than 50 years old, with no succession plan            0
           With health concerns, with no succession plan           0
     Financial capacity of owners (personal networth)
                                 Above 4x the total loans          5
                                    Between 2.1 and 4.0            4
                                    Between 1.0 and 2.0            2
                                               Less than 1         0
     Attitude to banks (Based on credit investigation)
  With established credit track record of at least 3 years         5
        Limited track record with banks, with no adverse
                                                    finding         3
                                   With adverse findings            0
                              Maximum points/Sub-total             20
 II. Market
                        No client more than 10% of sales          7.5
                   1 client between 10% to 20% of sales            4
        More than 1 client over 10% or 1 client over 20%           2
      Increase of Sales (average of last 3 years)
                                                   >10%           7.5
                                    5%< Increase <10%              5
                                           5%< or Stable           2
                   Decreasing sales or insufficicent data          0
                               Maximum points/Sub-total           15
 III. Production
                                               No supplier         4
                              No supplier more than 20%            3
                      1 supplier between 20% and 30%               2
  More than 1 supplier over 20% or 1 supplier over 30%             1
                    No inventory/Fast-moving inventory             4
          Inventory level acceptable for type of industry          2
     Slow-moving inventory/Perishable and/or high tech             0
     Production/service capacity and potential to
               May accommodate expanded operations                 4
                       Just sufficient for existing market         2
                          Inadequate for existing market           0
     Business location (in terms of market and supply)
                 Excellent location for type of business            3
                Acceptable location for type of business            2
                      Poor location for type of business            0
                               Maximum points/Sub-total            15
 IV. Cash
     Current Ratio (excluding past due ARs and obsolete inventory)
                                                   CR > 3          7.5
                                               2 < CR < 3           5

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                                                       1 < CR < 2      3
                                                           CR < 1      0
     Debt-Equity Ratio
                                                      DER < 50:50     7.5
                                              50:50 < DER < 67:33      5
                                              67:33 < DER < 75:25      3
                                                      DER > 75:25      0
      Debt servicing capacity
                                                          DSC > 2     30
                                                    1.5 < DSC < 2     20
                                                    1 < DSC < 1.5     10
                                                          DSC < 1      0
      Accounts receivable level
                                                   AR < 90 days        5
                                        90 days < AR < 180 days        3
                                                  AR > 180 days        0
                                        Maximum points/Sub-total      50
               Maximum Points/Total Score                             100
   Bonus Point for BIR FS-Based Evaluation                             3
                               Final Score                            103
                                                                    Passing   Attained    Risk
                                                                     Mark      Mark      Quality
                  Borrower Risk Rating (BRR)

How to use the Borrower Risk Rating System

Based on the areas of concern and the given risk indicators in the BRR, following is a
guide on how to accomplish, compute, and use the BRR Scorecard:


The information used in the analysis of the Cash indicators of the BRR shall be based
on the BIR-filed financial statements or the in-house financial statements of the
enterprise. The in-house FS may or may not be audited. When the BIR-filed FS is
used, a three (3) point incentive is to be given and added to the score.

1.       Current Ratio

The current ratio (CR) is a liquidity ratio which measures the enterprise’s ability to
meet its maturing short-term obligations. The CR is the most commonly used
measure of short-term solvency.
The formula for the current ratio is :

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Current Ratio = Current Assets/ Current Liabilities

The current ratio is computed by dividing the current assets by current liabilities.
Current assets normally include cash, marketable securities, accounts receivables,
inventories; current liabilities consist of accounts payable, short term notes payable,
current maturities of long term debt, accrued income taxes, and other accrued

In the computation of the CR, past due ARs and obsolete inventory are to be
excluded. The guidelines below are applied when computing for the CR:

Exclusion of account receivables exceeding 180 days; Below is the prescribed
methods in determining past due accounts receivable:

                                 Option 1 – Estimation on pro-rated basis

                                 1. Compute for AR level (in days) of the borrower based on
                                    latest FS
                                 2. Deduct this AR from the allowed 180 days limit
                                 3. In case of excess over the 180-day limit, get the percentage
                                    of excess over the total AR level as in following example:

                                       Computed AR level of the borrower            220 days
                                       Less: 180 days limit                                180 days
                                       Excess AR days                                40 days
                                       Percentage excess                            18% (40/ 220 days)

                                 4. Multiply the percentage excess to the actual peso AR
                                       Actual peso AR of the borrower           P1,000,000.00
                                       Percentage excess                          18%
                                       Past due portion of AR                   P 180,000.00

                                 Option 2 – Based on available aging of the ARs

                                      Exclusion of obsolete inventory, computed as estimate (on a
                                       pro-rated basis) using the following benchmark per type of

                                          90 days                180 days                270 days
                                     Food products           Farm inputs and         Home
                                     Micro electronics,       other agricultural       furnishings
                                      IT and                   products                Metal and
                                      telecommunication       Medical and              chemical
                                      s                        pharmaceutical           products
                                     Others                   products                Construction
                                                              Giftware and             materials
                                 Services (No                  holiday décors          Transport/

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                                 inventory):                  Non-food            motor vehicle
                                  Personal care               organic and         parts
                                     services                  natural products
                                  Manpower services          Wearables
                                  Recreation and             Publishing,
                                     cultural                  printing and
                                  Professional                advertising
                                  Financing
                                  Utilities
                                  Construction
                                  Garments support
                                  IT services,

                            Scoring shall be as follows:
                    When the CR is greater than 3, the score is the maximum at 7.5 points;
                    When the CR is greater than 2, but equal to or less than 3, the score is
                     at 5 points;
                    When the CR is greater than or equal to 1, but equal to or less than 2,
                     the score is at 3 points;
                    When the CR is less than 1, the score is 0.

2.    Debt- Equity Ratio

The debt – equity ratio (DER) is a measure of an enterprise’s financial leverage
calculated by dividing long-term debt by stockholder or the owner’s equity with the
total assets of the company. It indicates what proportion of equity and debt the
enterprise is using to finance its assets.

 It is calculated following the formula:

                                       Debt            :              Equity
                               Total liabilities               Total capital or equity
                               Total assets                :        Total assets

A high debt/equity ratio generally means a company has been aggressive in financing
its growth with debt. This can result in volatile earnings as a result of the additional
interest expense.

If a lot of debt is used to finance increased operations (high debt to equity), the
company could potentially generate more earnings than it would have without
this outside financing. If this were to increase earnings by a greater amount than the

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debt cost (interest), then the shareholders benefit as more earnings are being spread
around to the same amount of shareholders.

However, the cost of this debt financing may outweigh the return that the
company generates on the debt through investment and business activities and
become too much for the company to handle. This might lead to bankruptcy, which
would leave shareholders with nothing, so it is a delicate balance. This is what the
leverage effect is about and what the debt/equity ratio measures.

The debt/equity ratio will also be dependent on the industry in which the company
operates. For example, capital-intensive industries such as auto manufacturing tend
to have a debt/equity ratio above 2, while personal computer companies have a
debt/equity of under 0.5.

In the BRR scoring:

                                     When the DER equal to or less than 50:50, the score is at 7.5;
                                     When the DER is greater than 50:50 and equal to or less than
                                      67:33, the score is at 5;
                                     When the DER is greater than 67:33 and equal to or less than
                                      75:25, the score is at 3;
                                     When the DER is greater than 75:25, the score is at 0.

3.    Debt Servicing Capacity

The Debt Servicing Capacity (DSC) shows the ability of the enterprise to meet its loan
repayments. The ratio considers the net cash flow of the enterprise and how this net
cash flow is able to meet the debt repayments.

So in the formula used to compute the DSC, the net cash flow consists of the net
income less drawings or dividends including interest and depreciation expenses. The
total debt repayment, on the other hand, would be the principal plus interest for the
year of the long term and short term debts.

Principal and interest should be computed on the assumption that there is no grace

Specifically the formula is as follows:

                                DSC = Net Income – Drawings/Dividends + Interest + Depreciation
                                            (Principal + Interest) (t + 1) LTD + Interest (t + 1) STD

The amount for drawings or dividends to be used for the DSC computation shall be
based on actual figures reflected in the balance sheet statement of the company or

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the applicable family expenditure as appearing in the table below, whichever is higher.

                                                    Standard Annual Expenditure Brackets
                                 Size of family          Rural            Urban               NCR
                                  1-2 persons        100,000.00       150,000.00         250,000.00
                                  3-4 persons        150,000.00       200,000.00         300,000.00
                                  5-6 persons        200,000.00       250,000.00         350,000.00
                                  7-8 persons        250,000.00       300,000.00         400,000.00
                                  More than 8        350,000.00       400,000.00         500,000.00

In the BRR scoring:

                  When the DSC is greater than 2, the score is 30 points;
                  When the DSC is greater than 1.5 but less than or equal to 2, the score is
                   20 points;
                  When the DSC is greater than 1 or less than or equal to 1.5, the score is
                   10 points;
                  When the DSC is less than 1, the score is 0.

4.      Accounts Receivable Level

Accounts Receivables is money which is owed to the enterprise by a customer for
products and services provided on credit. This is treated as a current asset on a
balance sheet. A specific sale is generally only treated as an account receivable after
the customer is sent an invoice.

If the enterprise has receivables, this means it has made a sale but has yet to collect
the money from the customer. Most enterprises operate by allowing some portion of
their sales to be on credit.

These types of sales are usually made to frequent or special customers who are
invoiced periodically, and allow them to avoid the hassle of physically making
payments as each transaction occurs.

In other words, this is when a customer gives a company an IOU for goods or
services already received or rendered.

In the BRR score card the age of the accounts receivables is the one being scored.
While there are other factors to consider such as the market, the quality of the
product, etc. etc., the assumption is that the older the ARs the less efficient the
management of the enterprise in collecting from its customers.

The movement of the ARs has an impact on the cash flow of the enterprise. The
younger the ARs means, its movement is faster, which means better and more cash

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inflows for the enterprise.

To compute for the BRR Level, the following formula is used:

                                           AR / Sales x 360 days = AR Level

In the BRR scoring:

               When the AR level is less than or equal to 90 days, the score is at 5 points;
               When the AR is greater than 90 days, but equal to or not more than 180
                days, the score is at 3 points;
               When the AR is greater than 180 days, the score is 0.

                     Important Note:

                         An item in the balance sheet, “advances from stockholders” may be treated as
                     equity or debt depending on the willingness of the borrower or stockholder to sign a
                     Deed of undertaking committing that no drawing or settlement of the advances will be
                     made until the loan with SBC is fully settled.

                         If the borrower/stockholder agrees to sign the deed, the advances will be treated
                     as equity. Should the borrower/stockholder refuse to sign such an undertaking, the
                     advances will be treated as debt. In particular, it is to be treated as a short-term debt
                     and will impact on the DER and the CR of the borrower. It will however have no effect
                     on DSC.


1.                         Experience of Owners and Management (EOM)

This refers to the experience of the key people in the management of the enterprise in
running a business of similar or the same nature as the one being applied for

Only the key management people in the case of corporate accounts and the owner or
proprietor in the case of single proprietorships are to be considered in scoring this

In the case of corporate SMEs wherein there are several key people running the
business, the average years of their management experience is used in rating this

Sources of information for rating this factor may be taken from the following: the
owner/key people themselves in an interview, from the submitted resume’ or bio data

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of the owner, from interviews with other sources of information such as former
employers, bosses, friends, relatives, etc…

In the BRR scoring:

                    When the EOM is more than 15 years, the score is at 5 points;
                    When the EOM is less than or equal to 15 years but greater than five
                     years, the score is at 3 points;
                    When the EOM is less than or equal to five years, the score is at zero.

2.      Owner’s Health, Age, and Succession

This factor is about the ability of the owner or the key people in the business to meet
the demands of being an entrepreneur and being able to effectively manage the
enterprise in the face of financial, operational, management and personal problems.

The question that is addressed is “is the business managed well and will it continues
to be so in the event of an accident or illness befell the owners.

It focuses on the owner’s age, state of health, and whether or not there is a clear
succession plan in the event that the owner or key person in the business is
incapacitated or dies.

The assumption is that the credit risk is high when the owner is not physically,
mentally and emotionally well to manage the business and when there is no clear plan
on succession in the event something bad happens to the owner of the enterprise.

Sources of information to rate this factor may come from interviews with the owners
themselves, friends, and colleagues, from medical records and other personal

In the BRR scoring:

                  When age is less than 50 years old, with succession plan, the score is at
                   5 points;
                  When age is less than 50 years old with no succession plan, the score is
                   at 3 points;
                  When age is more than 50 years old, with succession plan, the score is at
                   3 points;
                  With health concerns, with succession plan, the score is at 3 points;
                  When age is more than 50 years old with no succession plan, the score is

                  When there are health concerns, with no succession plan, the score is 0.

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3.     Financial Capacity of Owners

This pertains to the personal net worth of the owner’s vis-à-vis loans payable. The
financial capacity of the owners (FCO) is the ratio of the personal net worth over total
loans payable.

The net worth is the difference between an individual or companies’ total assets (what
it owns) and its liabilities (what it owes). For a company, net worth is also known as
stockholders’ equity.

The formula for the FCO is as follows:

                                                   Personal Net Worth of Borrower
                                           FCO = ---------------------------------------
                                                   Total Loans Payable

This factor is being rated because it tests the capacity of the owners to inject more
money into the business should bad luck or a crisis situation happens.

This being the case, the personal net worth should be computed excluding the

                    Investments in the enterprise borrowing from SBC. However, investment
                     in other companies may be considered; and
                    Personal assets mortgaged or used as collateral for loans/debts from
                     SBC and from other parties.

In the case of corporations with more than one major stockholder, the account officer
should get the total net worth of these stockholders, computed in the manner
prescribed above.

In the BRR scoring:

                    When the FCO is more than 4X the total loans, the score is 5 points;
                    When the FCO is more than 2X but equal to or less than 4X the total
                     loans, the score is 4 points;
                    When FCO is more than or equal to 1X but equal to or less than 2X the
                     total loans, the score is 2 points;
                    When the FCO is less 1X the total loans, the score is 0.

3.        Attitude to Banks

This item in the borrower risk rating looks into the borrower’s dealings with banks;

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whether he has managed his accounts well, paid his amortizations diligently, complied
with the rules and the guidelines imposed on transactions, and had a positive track
record with his bank.

The assumption here is simple: if the borrower does not have a good attitude and
record with the banks, then most likely whatever violations or imprudence he or she
has made in past dealings with the banks would most be repeated with SBGFC. As
such, he would be rated on the basis of his credit track record with the banks and
other creditor financial institutions.

Loans from non-banks financial institutions (including credit cards) is also to be
considered as credit track record; in the same manner that a bad credit card record
affects the score of the borrower for this item since he gets 0 points. Track record
consisting of purely deposit accounts shall not be counted in this computation.

The basis for the rating information would be the credit investigation report of bank
dealings of the borrower as reported by the in-house credit investigator. The account
officer however, may on his own initiative pursue leads which may come his way in
the course of his evaluation of the application.

The following are the automatic provisions in the credit scoring system intended to
govern cases of a borrower having past due loans with other banks:

Any client who is not up to date in his obligation with any bank should be rated BRR 7
or worse;

                     Minimum BRR 7 if payments on the principal and/or interest are less
                         than 30 days past due;

                     Minimum BRR 8 if payments on the principal and/or interest are 30 to
                         90 days past due; and

                     Minimum BRR 9 if payments on the principal and/or interest are more
                         than 90 days past due.

In such cases, the above scores are automatically given and there is no longer a need
for the account officer to go through the process of accomplishing the scorecard.
Adverse findings automatically disqualify the borrower unless there is justifiable
reason to think otherwise.

The only justification accepted for going through the scorecard computation is when
there is compelling reason to believe that the company has gone through a temporary
period of difficulty and has started to recover/ has recovered.

In such instances, the principal and interest (outstanding balance) of the past due

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account will be treated as current portion of a long term debt. The impact of this
treatment will be reflected in the current ratio and debt service capacity of the

In the BRR scoring:

                    When the borrower has an established credit track record with banks
                     and other financial institutions of at least three years, the score is 5

                    When the borrower has limited track record (less than three years) with
                     banks and without any adverse findings, the score is 3 points;
                    When the borrower has adverse findings, the score is 0.


The two major strategies that enterprises employ to sell their products or services in
the market are 1.) Cost strategy in which the enterprise competes by lowering costs
and margins; and 2.) Product differentiation in which the SME finds a special niche in
the market where it can compete.

In the cost strategy, the SME often sells to a mass market and finds it difficult to
compete because it is unable to rival the prices of the big and more efficient firms. In
the product differentiation strategy, the SME will have more chances of growth and
development by having a differentiated product or service with a special niche and
can realize higher margins. It is able to dictate prices and will therefore have more
revenues and control of its growth.

1.                         Clients (concentration of sales)

In the marketing aspect of the BRR, two items are looked into: first is the number of
clients of the firm. It is assumed that the more distributed the clientele of the firm, the
better it is for its viability. Depending on only one or two major buyers puts the
business into a lot of more risk than one with more number of clientele.

A borrower who opted to have one major buyer but who has no problem finding other
buyers since the product is very marketable is still considered as risky. Whether the
borrower can really sell his products to other buyers is highly speculative.

In the BRR scoring:

                    When the borrower has no client more than 10% of sales
                     (meaning the sales of the enterprise is well spread out and not
                     dependent on one big client), the score is 7.5 points;

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                    When the borrower has one client between 10 to 20% of sales which
                     means the business depends on one client for a substantial portion of its
                     sales, the score is 4.0 points;

                    When the borrower has more than one client with more than 10% or one
                     client with more than 20% of sales, the score is 2.0 points.

2.          Increase in Sales

Second item looked into is the growth and trend of sales in the last three years.
Obviously, a viable business would tend to have an increasing growth in sales over
the years.

Annualizing income statement figures (e.g. net income, sales, cost of sales, etc.)
based on interim financial statements is generally frowned upon. Instead, the full year
immediately preceding the loan application should be taken as the latest year to be
included in the computation.

Thus, if the account officer is provided with a sales data for 2004, 2005 and one as of
June 30, 2006, he/she must work back and require the borrower to provide the 2003
figures. The average for the three year period from 2003-2005 is what will be used in
scoring the borrower’s average sales increase.

Balance sheet figures based on interim financial statements may be used for the other
computations in the BRR such as current ratio, debt to equity ratio, days receivable
and days inventory.

In the BRR scoring:
            Increase in sales greater than or equal to 10%, the score is 7.5 points.
            When sales increase has been greater than or equal to 5% but less than
             10%, the score is 5.0 points;
            When sales increase is stable and less than 5%, the score is 2.0 points.
            When there is insufficient data to compute, or there is decreasing sales,
             the score is 0 points.

Even if the average sales increase is equal to or greater than 10% but if there is a
reported sales level decreases in any of the three years subject of the computation,
this merits a score of 5 points.

If the average sales increase is between 5% to 10% and with a reported decrease in
the any of the three years subject of the computation, this merits a score of 2.0 points.

Sales level decreases in any two of the three year period subject of the computations
automatically merits a score of 0 points.

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1.        Suppliers

This item is looked into based on the context that when there is no supplier needed by
the enterprise, there is less credit risk. It therefore follows that the more dependent an
enterprise in a single or few suppliers, the higher the credit risk; and the more
suppliers an enterprise has the lower the credit risk.

       It operates on the premise that dependency on a single big supplier will disrupt
production operations whenever a disaster befalls the supplier, and having more
suppliers insulates the enterprise from production disruptions.

In the BRR scoring:

                b. No supplier needed is 4 points;
                c. When there is no supplier providing more than 20 percent of production
                   inputs, the score is 3 points;

                d. When there is a supplier providing more than 20 percent but less than
                   30 percent of production inputs, the score is 2 points;
                e. When there is a supplier providing more than 30 percent of production
                   inputs the score is 1 point.

2. Inventory

Inventory levels indicate two things: the efficiency by which goods are produced and
the speed these goods are delivered and sold in the market.

Relative to credit risk, a high inventory level is often associated with high credit risk
and so are high technology and perishable inventories. In this particular case, we look
at the speed by which inventory moves and benchmark this with industry standards.

The quality of the inventory whether these are high technology products such as
computers or highly perishable goods such as vegetables and other foodstuffs often
mean the enterprise is a high credit risk.

In coming up with the days inventory figure of the enterprise, we use the total
inventory figure as reflected in the balance sheet. This means that we take into
account all types of inventory: raw materials, work-in process and finished goods

Data for this may come from financial statements and historical records of the

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inventories of the enterprise and interviews with the owners and the people running
the enterprise.

In the BRR scoring:

                    When the inventory is fast moving or there is no inventory, the score is 4
                    When the inventory level of the enterprise is within acceptable levels of
                     inventory in its type of industry, the score is 2 points; and
                    When the inventory is slow moving, of a high technology or perishable
                     nature, the score is 0.

5.      Production and Service Capacity and Potential to Increase

This refers to the ability of the enterprise to meet the demand of the market for its
products and services basing on the existing production and service facilities, and its
potential to increase existing capacity to meet increased demands.

Consistent with the treatment of the other items in the BRR scorecard, the borrower
should be rated for this particular item based on his existing production capacity.

“May accommodate expanded operations” means that the company has excess
production capacity which it can utilize for additional production in order to
accommodate increased market demand.

Loans for the acquisition of equipment to replace old ones or in order to make the
production more cost efficient may be classified under this category and therefore
merits the full point.

“Just enough for existing market” means that the production capacity is maximized
based on the current market demand. This means that it cannot produce for a market
larger than what it serves now, without acquiring additional equipment or facility.

“Inadequate for existing market” means that the production capacity is way too small
for the market it serves now. To serve its market, it may have been subcontracting
the production or work to other firms or companies. Companies that have had
experiences of turning clients down or delayed deliveries are among the examples of
borrowers that would fall under this category.

Loans for the acquisition of additional equipment and construction of additional/ new
facility (factory, warehouse, etc.) should serve as an automatic signal to the account
officer that the borrower falls either under “just enough…” or “inadequate.” In this
case, the account officer should probe deeper to ascertain the appropriate scoring to
be given from the two categories mentioned.

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In the BRR scoring:

                    When the enterprise may accommodate expanded operations, the score
                     is 4 points;
                    When the production or service facilities are just sufficient for existing
                     market, the score is 2 points; and
                    When the production or service facilities are inadequate for the existing
                     market, the score is 0.

6.        Business Location

This refers to the proximity of the enterprise to its market and to its suppliers. The
assumption is that the nearer the enterprise to either or both its clientele and
suppliers, the lesser the credit risk involve. On the other hand, the farther it is from
these two, the higher the credit risk.

        Information regarding this item in the BRR is determined by observation,
interviews and research on the industry in which the enterprise belongs and the
project site proximity to markets and raw material sources.

“Excellent location” means the business is ideally and strategically located to both
markets and suppliers in terms of distance (within 100 km. radius from markets and
suppliers), accessibility (with good roads, seaports and airports, and serviced by
public transportation), and availability of needed facilities and other infrastructures
(telecommunication, banking, health, training and education, recreational services,

“Acceptable location” means the business is ideally and strategically located either to
or from the market or suppliers only, but not both.

“Poor location” for the type of business means location is far from markets and
suppliers and lacks in infrastructure and other facilities.

In the BRR scoring:

                    When the location is excellent for the type of business, the score is 3
                    When the location is acceptable for the type of business, the score is 2
                     points; and
                    When the location is poor for the type of business, the score is 0.

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Maintenance and Improvement of the System

The BRR system is to be maintained by the user groups which are the Financing
Delivery Sector and the various operating groups under it who use the system to
evaluate accounts and rate borrowers.

However, the system is to be continuously studied, evaluated and revised whenever
necessary by the Risk management Unit (RMU).

As the database of rated accounts are built up and statistical analysis permit a study
of its effectiveness as a rating tool, various critical factors of the BRR will be studied
and correlated to the probability of default. This would provide the needed data and
research inputs for the revision of the BRR System.

Hopefully, the system will evolve into a more reliable tool as the database reaches a
critical mass and serve as a more reliable basis for research.

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