refer to BSD Circular No. 08 of October 29, 2007 regarding
Guidelines on Internal Credit Risk Rating Systems in
It is clarified that the two dimensional rating requirement
is applicable on corporate/ commercial/ SME portfolios.
For retail loans (including retail SMEs) defined under
Section 3.1.16 of BSD Circular No. 08 of 2006, banks
and DFIs (hereinafter referred to as banks) may follow
a single rating dimension. However, rating system for
retail exposure should be oriented towards both borrower
and transaction risk and must capture all the relevant
borrower and transaction characteristics.
Banks shall develop an application and behavioral scorecards.
Application scorecards measure the credit worthiness
of a customer specifically at the application stage,
based on the application/ credit initiation data. Whereas,
behavioral scorecards measure the credit risk of a customer
by monitoring the repayment behavior, changes in demographics
and customer’s compliance with the loan covenants,
etc. These are more particularly used in credit management/
monitoring decisions such as credit renewal/restriction, limit enhancement/ reduction, re-pricing,
provisioning, etc. The banks should review and update
the assigned scores at regular intervals, which may
range from one month to a maximum of one year.
The selection of default drivers to be used for the
scorecard development depends on power of these drivers
towards predicting the default and as such these may
vary from one portfolio to another. The selection of
an appropriate model is at the banks’ discretion.
A list of some of the default drivers that may be used
for application and behavioral scorecards is annexed.
However, these are suggestive default drivers and banks
shall incorporate as many default drivers as they deem
fit for their portfolio.
Banks should validate the predictive power of the default
drivers and the model before putting the scorecard in
use. Moreover, the predicted and actual defaults should
be monitored on an ongoing basis and in case of significant
deviation, scorecard should be validated. The banks
should validate the scorecard on annual basis.
Banks need to analyze every retail loan using a set
of default drivers and assign a specific score to each
loan. Moreover, for advance approaches of credit risk
under Basel II, the rating of retail portfolio is done
on pooled basis. As such, banks shall assign each exposure
that falls within the definition of retail for IRB purposes
into a particular pool. Banks may use various attributes
of the default drivers used in the application and behavioral
scorecards as well as ranges of the assigned scores
for segregating the portfolio into different pools.
They must demonstrate that this process provides for
a meaningful differentiation of risk, provides for a
grouping of sufficiently homogenous exposures, and allows
for accurate and consistent estimation of loss characteristics
at pool level. Each obligor should be assigned a pool
on the basis of its risk profile such that exposures
sharing similar risk attributes should be assigned same
pool. There must be a meaningful distribution of borrowers
and exposures across pools and a single pool must not
include an undue concentration of the banks’ total
6. While reporting in e-CIB, the banks
are required to comply with the following points:
Application scores can generally be used up to six months
after underwriting the loan and after that, the banks
shall use behavioral scores.
b. Banks need to map the assigned scores
to one of the twelve rating grades defined in BSD Circular
No. 08 of 2007.
c. The rating corresponding to the
highest risk (lowest rating) should be reported in the
e-CIB in case the obligor has been assigned multiple
ratings based on multiple exposures.
Please acknowledge receipt.