How banks evaluate companies

The reasons why a bank may refuse a credit and how to check the chances of getting a loan before applying

Many Italian companies have difficulties in obtaining financing from banking institutions.

In most cases, the lender’s refusal to grant credit is due to the borrower’s credit history. To avoid such a situation, be sure to check your credit reference files before applying for a loan and limit the applications (any credit application, whether accepted or not, shows up in your credit files). However, the reason for the refusal can also be found in the credit crunch, which in 2010 has been exacerbated by a new regulation: the third Basel Capital Accord.

The Basel Capital Accord

In the late ‘80s, the risky speculative policies of many banks induced the Basel Committee to introduce a regulatory framework to supervise bank activities: the Basel Capital Accord.

With the entry into force of the Basel Capital Accord, banks were for the first time required to set aside a regulatory capital to cover potential unexpected losses.
In 2010, due to the bankruptcy of many institutions caused by the financial crisis, the Basel Committee amended the regulation increasing the amount of the regulatory capital to 8% of the risk-weighted assets at least.

In other words, any time the bank grants a loan, it must set aside at least an amount equal to 8% of the loan nominal value weighted for the associated credit risk, i.e. the probability the recipient company will entirely refund the loan.

Quantifying the credit risk

Banks can assess a company credit risk in two different ways; either using internal procedures, the so-called Internal Rating Based (IRB) methods, or by applying a specific risk weight coefficient according to the rating class assigned to the company by a qualified Rating Agency (ECAI). 

The table below shows the risk weight for each rating class.

For example, to grant a loan of € 100.000 to a company rated AAA, the bank must allocate € 1.600 to the regulatory capital (8% of 100.000 x 20%), whereas if the company got BB, the bank must set aside 8000€.

The rating may therefore be the discriminating factor in getting a loan from a bank.

How to check the chanches of getting loans

Before applying for a loan, you can check the credit score assigned to your company with s-peek. You just need to log in and download the Extended12M report of your company.

An Extended12M report. The credit score of the company is in the top left corner.

A credit score is an automated creditworthiness assessment based on the company’s financial data and it’s the first step in the rating's analysis process. The second step involves the financial analysts, which evaluate qualitative data otherwise not assessable (such as the company resilience to adverse events) and amend the score.
Only the result given by the union of the credit score and the analyses carried out by the financial analysts can be defined as a credit rating.

s-peek’s credit scores are calculated by modefinance and may differ by at last two classes compared to the rating. Having received the qualification of ECAI, modefinance’s rating can be used for the calculation of the risk weight coefficient

s-peek therefore provides a realistic assessment of the probability of getting financing from a bank.

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