The Borrower Risk Rating System in Identifying the Probability of Default of Retail Borrowers of the Small Business Corporation

Abstract

The study intended to assess the relevance of the risk factors with respondent borrowers relating to their experience of loan default as retail borrowers of Small Business Corporation. The researcher made use of the descriptive research method with the survey questionnaire as its instrument. The researcher-developed questionnaire was distributed to 104 respondents who have availed the different lending facility depending on the purpose and need of the borrowers. The gathered pertinent data were compiled, sorted out, organized, and tabulated. They were subjected to statistical tools to answer the questions proposed in the study. The statistical tools that were used to analyze the data and for testing the null hypothesis included the T-test, the weighted arithmetic mean, frequency and percentage, and the ANOVA. All aspects of Cash, Administration, Market & Production play an essential variable in the BRR System. Risk factors under the aspects of Cash and Administration were assessed by respondents as “Critical” in affecting probability; while Market and Production aspects were “Somehow Critical.” There was no significant difference in the respondents’ assessment on the critical level of risk factors in identifying the probability of default when grouped according to business organization. However, significant difference occurred under the Administration aspect when grouped according to years of operation; under Production aspect when grouped according to loan program availed; and Market aspect when grouped according to loan amount approved. The following were recommended: 1) Identify and select prospective clients for capacity building programs based on the risk profile that will be obtained after credit loan approval. 2) Design training modules not only on Cash and Administration aspects but also for Market and Production aspects as applicable for micro and small enterprises. 3) Account Officers must have financial acumen competency to ensure accuracy of BRR during credit evaluation. 4) For businesses which are in their early years, provision of training sessions on Strategic Planning, including the formulation of a marketing plan is recommended. 5) Enhance the Borrower Risk Rating (BRR). Point system under Financial Capacity of the Owners i.e., Personal Net worth under Administration where respondents’ assessment is “Very Critical” may be given higher points in the BRR System. 6) Also, consider a simple credit scorecard tool with variables more applicable to the nature and size of the business.