Credit Rating Model Based On Default Pyramid Principle:Empirical Evidence From Chinese Small Enterprises

Credit rating has an important impact on the contemporary society. In the second half year of2008, the catastrophic global finance crisis occurred, which is caused by subprime loan, house mortgage loan to those whose individual credit point is under620. On August6of2011, Standard&Poor’s announced that the United States sovereign credit downgraded from AAA to AA+, which caused a global financial market turbulence. Whether sovereign credit rating, bank credit rating, corporate credit rating, or individual credit rating, if the credit rating is unreasonable, it will mislead creditors and the society. As of the third quarter of2013, the statistical data demonstrated that small and medium-sized enterprises account for more than99%of total number of Chinese enterprises, that contribute to the GDP is about58.5%and their tax contribution is about52.2%, it also creates80%of urban jobs. However, due to the small size and a short period of small enterprises, it is difficult to find the classical indicators to describe the credit status of small enterprises. So the financing status and getting loans of small enterprises is more serious, credit rating of small enterprises need to be solved urgently.The objective of this research includes three parts:the construction of credit rating index system for small enterprises, the establishment of credit scoring model for small enterprises, and the construction of credit rating model for small enterprises. The construction of credit rating index system for small enterprises is to screen the indicators which can not only reflect small enterprises’repayment capacity and repayment willingness, but also can effectively distinguish the default status of small enterprises. The establishment of credit scoring model for small enterprises is to calculate their credit scores. Firstly, the distance between the default small enterprises and non-default small enterprises can be obtained. Secondly, according to the idea that the bigger the distance, the bigger the selected indicator weighting can be determined. Finally, the credit scores of small enterprises can be obtained. According to the default pyramid principle that the credit rating increases with the decreasing Loss Given Default (LGD), the credit rating model for small enterprises can be established by using the data of the owed loan capital and interest Lik, and the receivable loan capital and interest Rik. This model guarantees the result of small enterprises credit rating meeting the default pyramid standard. This dissertation includes five chapters. The first chapter analyzes the topic basis, the relative research development, methods, content and so on. The second chapter interprets the construction of the index system for small enterprises credit rating based on significant discrimination. The third chapter expounds the credit scoring model based on Fisher discrimination. The fourth chapter discusses the credit rating model of small enterprises based on the default pyramid principle. In the fifth chapter comes the conclusions and outlook.The major work of this dissertation is as follows:(1) This dissertation constructs the index system of small enterprises credit rating that reflects the features of Chinese small enterprises’loan.Considering the high-frequency indicators of relevant research and the credit rating data for small enterprises of a national commercial bank in China, this dissertation deletes the redundant indicators by combining correlation analysis and single variable regression analysis. Then by using significance discrimination, the key indicators which can effectively distinguish the default status of small enterprises are selected. Finally, this dissertation sets up the index system of small enterprises credit rating, which is composed of19indicators, such as interest rate safeguard multiplier, enterprise credit conditions in three years and so on.The repayment capacity of small enterprises is explained by profit growth rate, the current rate of net sales, and other indicators which can describe the financial situation of enterprises. Consumer price index (CPI), Engel coefficient (EC), and other indicators reflect the influence of regional economic development to the repayment capacity of small enterprises. Enterprise credit conditions in three years, the condition of enterprise legal disputes, and other indicators reveal the impact of non-financial factors reflecting the repayment willingness on the repayment capacity of small enterprises. Mortgage, pledge, and guarantee reflect the influence of collateral factors to small enterprises’solvency.(2) This dissertation constructs the credit scoring model for small enterprises that reflects the default discriminant ability for default small enterprises and non-default small enterprises.Considering the distance between default small enterprises and non-default small enterprises, the bigger the distance is, the bigger the weighting is, then the weighting of every selected indicator can be calculated by using Fisher discrimination method. On the basis of the linear weighted evaluation utilizing Fisher method, the credit scoring model for small enterprises, which reflects the default discriminant ability for default small enterprises and non-default small enterprises, can be established.(3) The dissertation also constructs the credit rating model for small enterprises which meets the default pyramid principle that the credit rating increases with the decreasing LGD.The dissertation established a nonlinear programming credit rating model consisting of the constraint condition that LGDs increase strictly and the objective function, i.e. the minimum distance of all adjacent rating LGDs, which ensures that the credit rating result meets the default pyramid standard. The result of small enterprises credit rating meeting the default pyramid standard has been obtained by an empirical study of a Chinese national commercial bank’s of3111small enterprises loan observations.