The Effects Of Non-financial Factors On Internal Credit Ratings

In recent years, complex market factors, as well as the release of Basel II have putforward higher requirements for commercia l banks in the internal credit rating system forcredit risk ma nagement. Basel II emphasizes the credit rating model's actual ability topredict the probability of default, but the current models are mostly predicting the ExpectedDefault Frequency (EDF) depend on the empirica l fina ncing data. In the other words, theyare just"backward looking models". Therefore, how to improve the rating of defaultprediction model have become the academic and the banking industry's concerning issue.Some America n scholar has pointed out that the combined use of fina ncia l and nonfinancia l factors leads to a more accurate prediction of future default events tha n the singleuse of fina ncia l factors (Berger et al, 2002). Foreign banks began to pay attention to therole of non-fina ncia l indica tors in the ratings model. But in the eyes of China's commercia lbanks the role of non-fina ncia l factors rema ins ambiguous.This paper will study Positive effects of non-fina ncia l indica tors on the effectivenessof EDF prediction. For this purpose this paper collects the data from the 300 companies ofthe Shanghai and Shenzhen300 index to support my hypothesis. This paper attempt to drawthe following conclusions: whether the non-fina ncia l indica tors such as the characteristicsof the industry, the risk of corporate governa nce, corporate strategy, the macro and thenatural environment etc. have a significa nt impact to the fina ncia l ability; non-fina ncia lindica tors as control variables on the fina ncia l indica tors for better predictability for theEDF. For this, in this paper on the basis of previous model we re-build model of the factorload ing, then reached three rating models:(1) Financia l indica tors model:(2) Non-fina ncia l indica tors: (3)The rating model with the intervention of non-fina ncia l indica tors:On this basis, this paper makes the analysis of the Reliability and Valid ity of this paper.The analysis has proved that all scales as effective tools, the data of this study was alsocarried out a descriptive statistica l analysis to prove that it can represent the overa ll goal. Inthis paper, I did the regression analysis by the SPSS and then got the conclusions as follows :(1) corporate credit rating and the EDF was nega tively correla tedCredit capacity of enterprises on behalf of the solvency of enterprises, in other words,the higher the credit capacity always accompany with the sma ller the possibility of default.Only a credit rating model which can be able to accurately predict an event of default ratingwill be effective. In this paper I use the well-recognized KMV model to verify the model,and the results showed that in this paper the design of the credit rating model with theintervention of the non-fina ncia l indica tors of is an effective model.The macro-economica l factor made the most contribution to expla in the variables in therating model。(2) The intervention of the non-fina ncia l indica tors make the credit rating model moreeffective.Accounting to the analysis, the co-relationship between the credit value and the EDFbecomes more significa nt with the involvement of non-fina ncia l indica tors. The resultexpla ins to some extent that the involvement of non-fina ncia l indica tors made the ratingmodel more effective. Thus commercia l banks should strengthen the considera tion of nonfinancia l indica tors.(3) Non-fina ncia l indica tors have a significa nt impact on the fina ncia l credit.In the regression analysis of the factors, we can see that the macro environment,industry is the most obvious factors which influence on the fina ncia l indica tors. This showsthat changes in the macro-economic environment affected the profitability of enterprises, and then affected the credit value of this indirectly. The relationship between The size ofthe company and the flow rate is the most significa nt, which indica te that the company'sexpansion policy to some extent affect the structure of assets and liabilities. There was asignifica nt positive correla tion between the Manage tier of quality and the fina ncia l factorsas said above, proving that the ma nagement of enterprises directly determines the quality ofthe credit capacity of enterprises.In this paper, the above conclusions have the following mea nings for the practice:First, commercia l banks should strengthen attention to non-fina ncia l indica tors in thecredit rating for companies.Now China's commercia l banks are step-by-step implementing the Basel2, which requiresall commercia l banks to meet the requirements of the new agreement in the effectiveness ofthe IRB. In this paper, non-fina ncia l indica tors'contribution to the credit capacity ofenterprises has been verified, and the idea of indica tors choosing has been put forward, so ithas pla yed a certain role in the contribution of credit rating model. It also remindedcommercia l banks to strengthen the considera tion of non-fina nc ia l factors when they makeloa ns decision-making.Secondly, enterprises should pay full attention to the coordinated development ofinternal policies and external environment.Enterprises should target at the macro-environment, changes in the industry to activelyadjust the internal policies, to control the size reasonably, to improve ma nagement qualityand pay attention to the complia nce of the lega lity of the transaction. It not only affects theperforma nce of the enterprise, but also affects overa ll credit, thus affecting the fina ncingcapacity, the market ima ge and so on. Therefore, the enterprises in the developmentprocess should not only do the assessment of fina ncia l indicators, but also achieve qualifiedin the soft non-fina ncia l factors.On the basis of Hypothesis being verified, the in-depth study of this article should bestrengthened. However, following study will involve in a large work and at the same timemy ability is very limited, so here this paper only gives the recommendations for thefollowing study:First of all, as the verifying model, there is still some doubt about the KMV model. For in Chinese market there is still controversy about information effectiveness. So themarket value which was used in the KMV ma y not reflect the information including bothfina ncial and non-fina ncial factor.Secondly, this research target is all of the listed companies, so it still needs test theapplicability for the med ium-sized company of the method of factor choosing. First of all,the sma ll and med ium enterprises have their own operational flexibility, combined with itsanti-risk ability is weak, so the non-fina ncial indica tors impact these types of enterprisescertainly greater. So the research on how the non-fina ncial indica tors impact the fina ncialindica tors will be a future direction.