2nd European Microfinance Conference 2005 WORKSHOP « Scoring or not scoring your clients? » Barcelona 27 October 2005

Rating and scoring – Experiences of Finnvera Plc EMN Micro Credit Seminar Barcelona, October 27, 2005 Ilpo Jokinen

State-owned specialised financing company Finnvera plc State-owned specialised financing company Loans, Guarantees and Export Guarantees 27,100 clients outstanding commitments as at 30 June 2005 export credit guarantees and special guarantees ca. EUR 4,8 billion credits and domestic guarantees ca. EUR 2,2 billion personnel 409 Oulu Kuopio Rovaniemi Kajaani Seinäjoki Jyväskylä Mikkeli Tampere Lahti Turku Regional office Head and regional office Vaasa Joensuu Pori Lappeenranta Helsinki & Uusimaa 11.1.2019

Business/corporate analysis Business analysis is a process that evaluates the profitability and the future outlooks of an enterprise Business analysis gives basis for financing decisions risk assessment Analysis is summarised in a written business analysis report and after that in a risk rating-symbol The scope and depth of an analysis depends on the size and investment, risks and development stage of a company 11.1.2019

Business analysis and rating In its original form the business analysis report was supposed to come to the conclusion about the financial viability of the applicant a kind of yes/no-judgement had to be made The implementation of rating has brought there an new aspect: it has become necessary to also rank yes-applicants in a way or other Risk classification (A, B1, B2, B3, C) good enough points will lead to positive credit decision Rating was implemented in the beginning of 1990’s after the deep recession, when it came obvious to be able to monitor the risk level of the portfolio 11.1.2019

Basic elements of rating in Finnvera Rating is based on business analyses and assessment of rating factors qualitative analyses quantitative analysis (financial statements) Assessment of rating factors rational thinking: factors favourable to the success of a company and factors harmful to success Management skills, market position, competitiveness, product development, etc ”Mechanical” rating, which controls the functionality of the system 11.1.2019

Rating process -after the business analysis Business analysis report Assessment of company’s management ownership & structure of company key persons & organisation business industry, products, customers marketing, competitiveness technology financial analyses profitability cash flow capital structure Weights and points for rating “tool” 11.1.2019

Rating “tool” (prototype of the model) 11.1.2019

Rating and scoring - similarities In a rating process business analyst gives points 1 – 5 for several characters of an entrepreneur and a company management skills, organization In a small company entrepreneur = management products or services, market focus financials and capital structure Finnvera normally grants financing companies obtaining classification B2, special cases also to B3 Risk classification helps to direct financing for acceptable projects and makes it possible to set targets for risk level 11.1.2019

Risk classes in 2000’s (1) “Investment grade” 11.1.2019

Finnvera’s rating in 2000’s (2) “Speculative grade” 11.1.2019

One-year default rate, yearly measurements 1991 - 2004 Average 11.1.2019

One-year ”default” rate - average of 13 year’s quarterly measurements 11.1.2019

Utilisation of rating Pricing (risk premium) Delegation of financial decisions Measurement of risk in financial decisions Follow-up of client behaviour transition matrixes: how the clients are behaving on the rating scale in general (upwards/downwards/stable) 11.1.2019