Based on the given theoretical framework, data were collected regarding different individual borrowers and companies based on different industry segments. Such as the case for M/s XYZ enterprises, the name is kept confidential given the research is still under process.
Even though the company's overall ICRRS score was about 73.8%, some of the individual factors in ICRRS such as corporate governance, management risk,cash flow based accrual ratio or compliance risk was rated as unacceptable. From a financial perspective these individual factors can be a bit concerning. Moreover even after repeated ICRRS rating done annually over a period of time, some of the individual factors still remained unacceptable, suggesting that the financial performance under these factors were not improved. And ultimately the borrower was classified as SS or sub standard due to his delayed payments.
For further analysis, let us look how individual factors may affect the financial performance of the borrower.
Key components of ICRRS:
Quantitative assessment:
1. Leverage ratio tells us about the company's ability to meet its financial obligations. And therefore suggesting that an unacceptable rating indicates that the company is struggling to meet their financial obligations.
2. Liquidity Ratio tells us about the company's ability to liquidate their assets in order to pay off their short term debt instruments. And therefore suggesting that an unacceptable rating indicates that the company is struggling to pay off their short-term liabilities.
3. Profitability ratio tells us about the company's ability to generate profits from their business operations. And therefore suggesting that an unacceptable rating indicates that the company is unable to generate enough profits to sustain their business operation.
4. Coverage ratio tells us about the company's ability to pay off their interest expenses, coming from debts or dividends. And therefore suggesting that an unacceptable rating indicates that the company is facing problems to meet their interests payment obligations.
5. Operational efficiency indicates the company's ability to efficiently manage their operations and thereby reducing their operating cost which ultimately means they are trying to maximize their profits. And therefore suggesting that an unacceptable rating indicates that the company is ineffective in their business activities.
6. Earning quality ratio tells us about the company's ability to make sustainable earnings and thereby running a successful business. And therefore suggesting that an unacceptable rating indicates that the company has issues regarding the company's quality of earning.
Qualitative assessment:
1. Performance behavior indicates the company's approach towards their goals,objectives, values and commitments. It indicates their responsibility towards their obligations. Therefore, having an unacceptable rating indicates that the company is not working in due compliance with their obligations
2. Business and Industry risk indicates the growth of the industry sector or business in terms of their brand value, profitability and volatility. Therefore, having an unacceptable rating indicates a failing business or declining growth of an industry sector.
3. Management risk refers to the management team of the company and their ability to analyze, identify, evaluate or treat loss exposures. Therefore, having an unacceptable rating indicates that the management team of the company failed to comply with their job.
4. Security risk tells us about the company's ability to submit adequate collateral and guarantees. Therefore, having an acceptable rating indicates that the company failed to provide adequate guarantees or eligible collateral.
5. Relationship risk tells us about the consequences or benefits of communication, collaboration and alignment of business partners. An unacceptable rating indicates conflicts among partners or lack of communication and collaboration which can hinder the company's long-term obligations.
6. Compliance risk indicates the company's approach towards following proper rules and regulations which can directly affect the reputation of the company. Therefore, having an unacceptable rating indicates that the company is in direct violation of those regulations which ultimately hinders the company's brand value and reputation in the market.
In the context of Quantitative assessment, we have seen how having an unacceptable rating hinders the financial performance of a business and thereby affecting their ability to meet financial obligations. And since Qualitative assessments are assessed by humans based on their observations and the given information, it is more prone to human errors and biases which might provide irrelevant data and thereby affect the firm's performance.
The data collected was further crosschecked and the results showed that borrowers or company's which had multiple unacceptable ratings in their quantitative and qualitative factors, showed a decline in their financial performance and ICRRS score. Thereby supporting the purpose of this research.