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13IMPROVING THE ANALYSIS OF CREDITWORTHINES OF BUSINESS
ENTITIES
Normumin Normamatovich Mavlanov Guzal Samadjon qizi Mahmudova
PhD, associate professor, "Economic Teacher, "Economical analysis"
analysis" department, Tashkent Institute of department, Tashkent Institute of Finance Finance
ABSTRACT
The main issue for all creditors in the Republic of Uzbekistan is how to effectively lend to companies, with adequate increase of rate of return. Specifically, commercial banks are using traditional credit analysis methods, which are very slow, simple and expensive, or on the other hand using one of the world most developed models for assessing company's creditworthiness, which are still not adapted to the characteristics and performance of national business ventures. It is emphasized from a professional and practical standpoint, that the models for assessing company's creditworthiness developed for individual market, give significantly better results than other "standardized models", and this represents the basic assumption of this research. Financial statements of national companies, together with their analytical indicators, in best way reflect their characteristics. As such, they are the basis for developing a model for assessing companies' creditworthiness, which is the main goal of the research. The hypothesis of the paper is "Respecting the characteristics of national companies and current procedures of creditworthiness assessment, it is possible to develop a creditworthiness analysis model for the Republic of Uzbekistan, that will be more efficient than generally known models". The result of the research is a model that can be practically applied, which contributes to increasing efficiency in decision making, and which can meet the requirements of the digital economy.
Keywords: Creditworthiness, financial indicators, non-financial indicators, evaluation criteria, scoring model, coefficient method.
Introduction
The ongoing reforms in the Republic of Uzbekistan are the basis for the development of national economy. Especially in recent years, the implementation of broad reforms in various sectors of the economy is paving the way for further sustainable development. The adoption of laws, decisions and decrees on further improving the banking system, which is the "driver" of national economy, ensures the harmonious development of this industry.
In particular, the Decree of the President of the Republic of Uzbekistan (Decree, 2018) states to develop own scoring model by commercial banks, which will allow
assessing the level of creditworthiness of a potential borrower and reducing the terms of loans (microloans) to individuals and small businesses and implement them in practice as one of the prime objectives.
International experience shows that various credit scoring models used by banks are one of the modern methods that allow to accurately and comprehensively assess the creditworthiness of the client. This helps to select the most suitable client and significantly reduce credit risk. This means that losses related to non-repayment of the loan are avoided. Accurate, complete and prompt assessment of creditworthiness is important not only to reduce credit risk for banks, but also to reduce the risk of non-repayment of credit for enterprises. It should be noted that the use of the credit scoring model in the practice of banks provides the expected effect for both the bank and the enterprise. Therefore, the credit scoring model serves as an important tool in determining the most optimal customers in the banking practice of developed countries.
Dozens of researchers and scholar conducted investigations into creditworthiness analysis and assessment of business entities. On the analysis and assessment of creditworthiness of enterprises (Endovitsky and Bocharova, 2005), analysis of creditworthiness of companies and organizations (Endovitsky et al., 2016), assessment of creditworthiness of borrowers (Naumchenkova, 2016), financial analysis of enterprises (Liferenko, 2005), issues of creditworthiness in banking (Abdullaeva, 2017), evaluating creditworthiness of clients by commercial banks (Azizov et al., 2016), analysis of the financial condition of economic entities and creditworthiness (Rakhimov, 2015), improving the practice of assessing the creditworthiness of customers in commercial banks of the Republic of Uzbekistan (Mamatov et al., 2016) have been explored. Although, the relevance of the creditworthiness analysis and assessment, theoretical aspects, foreign experience, the current procedures have been covered in detail in the works of scientists, there has not been developed a complex approach and methodology on evaluating creditworthiness of business units and software which meets the requirements of digital economy.
Almardonov (2017) recommended the method of coefficients for assessing the creditworthiness, ie 8 coefficients for improving the practice of assessing the creditworthiness of small businesses.
The coefficient method mainly assesses the financial aspects of the enterprise. In this case, the coefficients assess the creditworthiness on the basis of the indicators of the completed period, but the loan is allocated for the next period.
Almardonov does not focus on the following aspects in his researches:
- creditworthiness is assessed on the basis of financial indicators, ie 8 coefficients do not allow a complete financial analysis of the enterprise;
- non-financial indicators are not taken into account in the assessment of creditworthiness;
- perspective analysis of creditworthiness assessment has not been carried out;
- an improved program has not been developed that allows the method of coefficients to be calculated at the standard level and quickly.
Materials and methods
The main objective of the research is to alleviate credit risk through the development of scoring model of creditworthiness analysis and assessment based on analytical indicators that reflect the specifics of the national economy. A model created in this way will be based on the current values and performance of the companies. As such, the model should be tested in relation to existing models in order to prove that the results obtained by it are more adequate and better. It is necessary to note that the aim of the research is to draw the maximum from the financial statements and analytical indicators. Therefore, the aim of the paper is to investigate:
the existing application of financial statements and analytical indicators used in the assessment of the creditworthiness of enterprises, the possibility of developing and applying a new model for assessing the creditworthiness of companies from the local market,
the level of reliability and accuracy of the new model for the company's creditworthiness in classifying them to classes.
In the course of the research, comparisons of practical materials, analysis with the help of statistics and tables were carried out, based on the results of which clear conclusions and recommendations were made.
Results
Since the emergence of the market economy, credit relations have been continuously improving and developing, and this process is expected to continue on a larger scale in the future. This is because credit relations are an important financial factor for many businesses in the economy to start, operate and expand.
What are the criteria and procedures for attracting bank loans and credits? In this regard, the main issue in establishing credit relations between enterprises and commercial banks is the analysis of their creditworthiness and the improvement of its valuation practice. Each commercial bank pursues an independent policy on credit relations with its customers. However, in all of them, attention should be paid to one important aspect, namely, a clear assessment of the creditworthiness of the enterprise.
Various methods are used in the analysis and assessment of the creditworthiness of enterprises in commercial banks of Uzbekistan. It should be noted that in the practice of banks in the analysis and assessment of creditworthiness of enterprises are used three types of coefficients: coverage, liquidity and autonomy. On the basis of these coefficients, the creditworthiness of enterprises is assessed on the basis of three classes. The following table describes the analytical indicators and their classification by classes.
Table 1. Criteria for assessing creditworthiness used by domestic banks
Indicators I class II class III class
1. Coverage ratio(Cr) Cr > 2 2> Cr >1 1> Cr
2. Liquidity ratio (Lr) Lr > 1,5 1,5> Lr >1 1> Lr
3. Autonomy ratio (Ar) Ar > 60% 60%> Ar >30% 30%> Ar
Source: Authors
The criteria for assessing the creditworthiness of this procedure have the following shortcomings and general aspects that need to be improved:
- shortcomings in the method of calculating coefficients;
- impossibility to fully assess the financial condition of the enterprise on the basis of these coefficients;
- international experience is not taken into account.
These shortcomings are analytically as follows.
1. In banking practice, the coverage ratio is calculated by dividing current assets (line 390) by current liabilities (line 600). In this case, a number of current assets can not be used to repay the loan. Including the part of "finished goods (goods)" in the structure of finished products (goods), expenses for the next period (line 190), overdue expenses (line 200), overdue receivables (line 211) in account receivables, prepayments to employees (250 lines), prepayments to the budget on taxes and other obligatory payments (270 lines), prepayments to target state funds and insurance (280 lines), debts of shareholders on shares in the authorized capital (290 lines) are not funds for loan repayment current assets. These and similar serious shortcomings are present in all of the above coefficients.
2. It is impossible to fully assess the financial condition of the enterprise with three coefficients. This requires the use of a number of indicators that reveal the financial condition of the enterprise.
It is important to eliminate the above-mentioned shortcomings in order to improve the assessment of the creditworthiness of the enterprise in the banking sector of the country on the basis of the requirements of the period. The purpose of this is to conduct a complete, accurate and rapid assessment of the creditworthiness of borrowers. This will allow to select the most suitable enterprises that are eligible for credit. As a result, credit risk is significantly reduced.
In order to effectively implement the work in this area, an improved software "Scoring model of creditworthiness analysis" was developed by authors and certified by the Intellectual Property Agency of the Republic of Uzbekistan (№DGU 05087. 05.03.2018).
The software of "Scoring model of creditworthiness analysis" assesses the creditworthiness of enterprises divided into 5 classes on the basis of two important aspects:
1. Evaluation on the basis of financial indicators (liquidity indicators, balance sheet liquidity, turnover indicators, profitability indicators, stability indicators and Altman model);
We know that one of the most reliable models for assessing an enterprise's bankruptcy through its financial statements is the Altman model. Altman's Z-Score model is a numerical measurement that is used to predict the chances of a business going bankrupt in the next two years. The model was developed by American finance professor Edward Altman in 1968 as a measure of the financial stability of companies. Altman's Z-score model is considered an effective method of predicting the state of financial distress of any organization by using multiple balance sheet values and corporate income.
Investors use the Altman's Z-score to make a decision on whether to buy or sell a company's stock, depending on the assessed financial strength. If a company shows a Z-score closer to 3, investors may consider purchasing the company's stock since there is minimal risk of the business going bankrupt in the next two years.
However, if a company shows a Z-score closer to 1.8, the investors may consider selling the company's stock to avoid losing their investments since the score implies a high probability of going bankrupt.
Based on the above, the use of the Altman model in assessing creditworthiness is important in ensuring the reliability of the methodology being developed. For this reason, we also paid special attention to the Altman model in the process of developing "Scoring Model of Creditworthiness Analysis and Evaluation".
2. Evaluation on the basis of non-financial indicators (total credit history, credit security, project realism, the level of competitiveness of the product, business reputation).
The creditworthiness of the enterprise is assessed by 100 points on the basis of financial indicators and 100 points on the basis of non-financial indicators with a total of 200 points. Assessment of creditworthiness on the basis of financial and non-financial indicators have been described in the following tables.
In most of the literature devoted to the analysis of creditworthiness, financial indicators are recognized as quantitative indicators, and non-financial indicators as qualitative indicators.
However, since financial indicators are mainly composed of financial ratios, and non-financial indicators also take into account the internal and external factors of the enterprise, we decided to express them into financial and non-financial groups.
Table 2. Assessment of creditworthiness on the basis offinancial indicators
Point Classes on creditworthiness
Indica tors distri- Standard F LI int Standard Pli im Standard F LI int Standard Foint Standard Foint
bution 1-class 2- class 3- class 4- class 5- class
1. Со грога te Liqnidicy indicators: 15 15 12 5 6 0
Current liqniditY ratio s i U=>Gtf>l 3 bCk^.i
Quick liqnidicy ratio 5 1.2 5-; 5 4 ffip0,7í 3 0.755-01^.5 2 0
Cash flow liqudity ratio 5 0,75-; 0:5=€tb=4:25 J 0:25=Ш>0:1 J »i «
2. Balance shee-t Liqnidicy ratios 15 AlïPl A2>P2 A3=P3 A4>P4 A5-;P5 15 AlïPl A2>P2 A3sP3 A4>P4 A5<P5 it ou condition 15 not 12 АЬР1 А2эР2 A3sP3 А4эР4 A5--P5 it 2 conditions are not ni^t 10 AlsPl A2>P2 A3sP3 A4>P4 A5<P5 it 3 conditions 51= not Hirt 5 AliPl A2>P2 АЗэРЗ А4ЯЧ A5<F5 it th? conditions ar^notni^tatali a
3. Analy sis o f a ssets' turno ver: 20 20 16 u 8
Carrent assets turnover CaM2 12sCit5í 4 3 4sCats3 2 3>Cit>0 0
ReceivabLes turnover КЫ2 12>ЕЫ 6s-Kts4 3 1 3>Rt>0 3
Payables tnrnover 4 3 2 0
Invento ту turnover ? toi 2 12> It sí 4 i>Itï4 3 4>It>3 3>ItsO 3
4. Pro fita bihty indica tors analy sis: 15 15 12 5 6 0
Retnrn on current assets 5 ROAMO% 5 40%sSOA>3ÜK 4 30№>RDArfQW 3 20%>KOAMR (inflation rate) 2 ROA-áR. (inflation rate) 0
Retnrn on equity 5 RDEs40% 5 40%> ROE s30% 4 30%>ROE >20% 3 20%>RDEs-ID 2 EDE-íIR a
Cross ma rein - GM 540% i 40№sGM=30% 4 3(Bfc>GMi2tíi 3 20!4>GlIsl0% GM---IR
S. AnaJy sis o f financia Ista biliry indica tors: 15 15 12 5 6 0
Financialindependence ratio ? ЕПЫ1.6 O.iï-FEtfl.? 0.5гЕПЫ).4 3 U.4=>FUfcHJJ FIR<0.3
Debt to eqnity ratio 5 D,2=BEfcO 0.4>DEH?0.2 4 0.5=-DEK?0.4 3 UDEÍM.5 2 DER>1 0
Eqnity ni о biliry ratio 5 EMIM,5 s 0,5sElIKM):4 0:4sEMKM):3 0,3sElIKM):2 - EMK-I-J1.2 3
6. Assessment of creditrrorthiness accordine to rte Air tua ci mode! 20 20 15 10 5 AfedJÍ 0
Total points 100 100 79 S9 3S 0
Source: Authors
Table 2. Assessment of crediiwo rthine s s on the basis of non-financial indicators
Indicators
Feints
Credit history of business.:
Classes
29
A. comp any has been rep aying credits from banks, including customer bank for more than 3 years on time and in
fa.
1 class
10
A. company has been repaying credits from banks, including customer bank up to 3 years on time and in full.
2 class
15
In the last three years, banks, including the customer bank, have been repaid the credit amount (principal and interest) late or in p art. However, the lo ail and its interest ha ve b een rep aid in full (within a month).
3 class
12
In the last three years, banks, including the customer bank, have been repaid the credit amount (principal and interest) late or in part. However, the loan and its interest have b een repaid in full (for more than a month).
4 class
A comp any ha s not rep aid credits (principal and interests) from banks, including customer bank in full.
5 class
Credit se cur luv ;
29
The collateral is modem, highly liquid, sufficient, the ownership belongs to the enterprise. The financial condition of the guarantor is absolutely stable. The insurance policy fully covers the loan and is taken for the full term.
1 class
20
The collateral is new. liquid, sufficient, the ownership belongs to the enterprise. The financial condition of the guarantor is stable. The insurance policv covered 50% of theloan and received 50% oftheperiod.
2 class
15
The coDateial is more than 50% obsolete, liquid, insufficient, ownership belongs to the enterpnse. The financial condition of the guarantor is stable. The insurance policy covered the loan from 25% to 50% and was taken from 25% to 50% of the period._
3 class
12
The collateral is old, illiquid, insufficient, the ownership belongs to another enterprise. The financial condition ofthe guarantor is unstable. The insurance policy coveredlessthan25% ofthe loan and less than 25% ofthe period was taken.
4 class
The collateral is invalid, illiquid, insufficient, the right of ownership belongs to another enterprise. The financial condition o f the guarantor is b ankrupt The insurancep olicv covered less than2 5% o f the lo an and less than 2 5% o f the period was taken._
5 class
Project realism:
29
Meets the requirements ofthe Bank's credit policy and has sound sources of information There is an opportunity to implement the project: a positive financial result ofthe enterprise and the amount of cash flow is enough to repay the lo an amount (princip al and interest). Hie business plan o f theproj e ctis economically andpra ctically sound. The comp any has enough competent staff! There are favorable natural c onditions, ade quate infrastructure and utilities.
1 class
20
Meets the requirements ofthe Bank's credit policy and has sound sources of information. There is an opportunity to implement the project: a positive financial result ofthe enterprise and the amount of cash flow is enough to repay the lo an amount (princip al and interest). The business piano f theproj ectis economically andpra ctically sound. The
2 class
15
_
company does not have enough competent employees. There are favorable natural conditions and adequate infia structure. There is a delav in the provision of utilities.
Meets the requirements of the Bank's credit policy and has sufficient sources of information. There is a serious risk in the implementation o f the project The positive financial result of the enterprise and the amount of cash flow are sufficient to repay the loan amount (principal and interest). The company does not have enough competent employees. There are favorable natural conditions and adequate infra structure. There is a delay in the provision of utilities. 3 class 12
It does not fully meet the requirements of the bank's credit policy and does not have sufficient sources of information. There is a serious risk in the implementation of the project. The positive financial result of the enterprise and the factthatthe amount of cash flow is sufficient to repay the loan amount (principal and interest) depends on the risk. The company does not have enough competent employees. There are favorable natural conditions and adequate infrastructure. There is a delay in the provision of utilities. 4 class 9
Does not meet the requirements of the bank's credit policy and does not have sufficient sources of information. There is a high risk in the implementation of the project. The negative financial result of the enterprise and the amount of cash flow are not enough to repay the loan amount (princip al and interest). The company does not have enough competent employees.Favorable natural conditions and infrastructure are not available. Utilities are bad. 5 class 0
Goods level 20
Diversity ofgoods,high quality, high added value and optimal pnce, optimal cost, good sales service, high demand. 1 class 20
There is a variety of goods, high quality, good sales service, optimal pricing, differentiated cost, demand. 2 class 15
Lack of tvpe of goods, average quality, average price, average cost, sales semce. 3 class 12
Lack of tvpe o f go o ds, low quality, average price, high cost, sales semce is not at the level of demand. 4 class 9
Lack of type of goods, low quality, average price, high cost, no sales semce, very low demand. 5 class 0
Business reputation 20
The companyhas a high position in the industry andthebraneh, a high reputation in the market, a wiell-known brand 1 class 20
The company's position in the industry and the branch is average, has a reputation in the market, the brand is familiar to customers 2 class 15
The role of the enterpnse m the industry and the branch is not noticeable significant, the brand is not familial to customers. 3 class 12
The role of the enterprise in the industry and the branch is not significant, the brand is not familiar to customers. 4 class 9
The role of the enterprise in the industry and the branch does not matter, it does not have its own reputation in the market, it does not have a brand. 5 class 0
Total score 10b
Source: Authors
According to the creditworthiness analysis and its scoring model, the total score is studied in 5 classes in the range from 0 to 200 points. Table 4 provides full details by grades.
Table 4. The order of credit allocation by classes
Class Brief explanation Total (score)
1-class This category of enterprises are high creditability. Credits to these enterprises can be provided on a preferential basis in the general order. 156-200
2- class This category of enterprises has the ability to repay the loan. These enterprises can be allocated loans in the prescribed manner. 120-155
3- class Businesses in this category do not have the ability to repay the loan. In some cases, it is possible to provide loans to these enterprises at high interest rates. 82-119
4- class The financial condition of the enterprise is not stable. Credit risk is very high in this category of enterprises. 81 rana
5- class Credit is not provided to this category of enterprises. 0
Source: Authors
The above methodology reveals the essence of the creditworthiness analysis and scoring model of its assessment, taking into account the characteristics of the national economy. International models, national experience, practical problems and approaches to their solutions were used in the development of this model.
Discussion
The proposed methodology and model of creditworthiness analysis and assessment has the following advantages:
1. This model has the ability to accurately, fully, comprehensively assess the creditworthiness of the enterprise.
2. In contrast to the current assessment, the creditworthiness status is based on 5 classes. This will increase the ability of banks to select enterprises on the basis of creditworthiness. The following table provides a comparative analysis of the current and proposed scoring model of creditworthiness analysis and valuation.
Table 5. A comparative analysis of the current and proposed scoring model of
creditworthiness analysis and valuation
In the current order In the scoring model
Class Credit allocation condition CHH$ Credit allocation condition
1-class Credit is allocated 1-class It is possible to allocate a loan on a
preferential basis
2-class Credit can be allocated in 2-class Credit is allocated in general order
individual cases
3-class Credit is not allocated 3-class Credit can be allocated at high interest rates
in individual cases
4-class Too high credit ris!
5-class Credit is not allocated
Source: Authors
3. The methods of calculating the criteria for assessing creditworthiness have been improved, ie the level of accuracy has been increased.
4. Being developed taking into account international experience
Conclusion
In the practice of the banks of the Republic of Uzbekistan, the coefficient method is used to assess the creditworthiness of enterprises. The main focus is on financial performance. In the coefficient method, it is not possible to fully disclose financial performance with these three ratios. In addition, the shortcomings of the method of calculating these coefficients further indicate that the uncertainty of this method is high. Another disadvantage of this coefficient method is that the loan is allocated to the next period, based on the data of the completed period. Predicting future activities is one of the important tasks.
Another aspect that is not paid attention to by banks, but is important to pay attention to, is non-financial indicators. Non-financial indicators are one of the important factors for the sustainable development of future activities of enterprises.
Taking into account the above existing shortcomings and combining foreign experience, the methodology "Scoring model of creditworthiness analysis" was developed.
This methodology allows to sharply reduce credit risk through a comprehensive assessment of creditworthiness of the enterprise on the basis of financial and non-financial indicators.
REFERENCES
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