Predicting Financial Solvency of Commercial Borrowers: The Case of Non-Banking Financial Companies

Abstract

Credit risk can be effectively managed by evaluating and predicting the credit worthiness of a customer or a corporate. Credit scores are calculated to assess the credit worthiness. It helps the financial institutes to know the amount and dimensions of risk involved in different credit transactions. Credit scoring helps the financial institutes to decide whether or not to lend. It also helps in deciding the price of a particular exposure, the appropriate credit facility and different risk tools. This research paper focuses on identifying the triggers of credit default. It also focuses on checking and predicting the financial solvency of the borrowers of non-banking financial companies and assigning the credit worthiness to these companies. The data is collected from a Mumbai based NBFC. The data for the study are extracted from balance sheet and profit &loss statement of these companies. The data includes the financial ratio variables for forty companies. Altman's Z-score is used to find credit worthiness and DuPont technique is used to find the main causes of financial distress. The results of this research highlights that the borrowing companies having a lower return on equity (ROE) are prone to be in distress zone. This research would help the financial institutions to identify the most likely defaulter companies and to segment the clients/companies in safe, grey and distressed zones. The results are robust to sub-samples.