Hypothetical Statistical Model

Assumptions:

The Credit exposure is affected by individual factors under quantitative and qualitative factors.

The number of Unacceptable ratings can affect the quality of ICRRS.

Increase in unacceptable rating increases risk percentage.

Risk percentage is positively correlated with probability of loan loss.

For our hypothetical model let us consider the following;

We take the overall risk factor as 12, which is the total number of individual factors under quantitative and qualitative assessment.

We denote number of unacceptable rating as ŭ

Risk ratio as ß

Therefore, ß=ŭ/12

We use x to denote the amount of loan loss and ẅ as the weight of the loan

Therefore, x=ẅ×ß

The probability of loan loss can be assessed as, P(loan loss)=(ratio of risk/Total ratio)

Take for example, a client of Ŋ Ɓank recently took out a loan worth 2000 cr, it is a SOD(G), which is a form of bank overdraft with a maximum limit of 2000 cr. Given that, the client had 3 unacceptable ratings within his ICRRS score. Therefore;

ß=ŭ/12

ß=3/12

ß=0.25 or 25%

It is essential to calculate the probability of loan loss, and loss amount in case the borrower fails to complete his obligations.

We know,

x=ẅ×ß

So, x=2000×25%

x=500cr

Again,

P(loan loss)=(ratio of risk/Total ratio)

So, P=0.25/1

Or, P=0.25

We can now verify the probability by putting the values as such

P=loss amount/Total outstanding amount

P=500/2000

Or, P=0.25

And just to be fair the said client actually didn't pay 500cr and asked for rescheduling it.

Thereby proving the above mentioned criteria. For more search the topic name.