Credit ratings in the Philippines may not be as highly sensational as those in the US, but do not be mistaken to overlook or abuse it. There are still credit rating regulations and associations regulating borrowing privileges and activities in the Philippines.
The chances of being approved of an applicant for a credit card, loan or a bank account does not have a single formula and can range from a number of different factors. The decision made by the financial institution is dependent on several factors which includes, but is not limited to the business and financial risks of an individual or a business.
The Philippine Rating Services Corporation (PhilRatings) is the only Bangko Sentral ng Pilipinas (BSP) and Securities and Exchange Commission (SEC) -accredited credit rating agency in the Philippines. Together with 25 domestic credit rating agencies in Asia, PhilRatings is an active participant and one of the founding members of the Association of Credit Rating Agencies in Asia (ACRAA).
According to PhilRatings, a credit rating “serves as an unbiased, independent evaluation of the creditworthiness of a borrower. It is a grading system that provides an objective measure of credit quality, particularly the ability to pay the financial obligations upon maturity.”
How is a borrower rated?
The rating process of borrowers is a 7-step procedure completed by the credit rating agency. These are:
- Rating Request
- Data Gathering and Analysis
- Management Meetings
- Rating Committee / Assignment of Rating
- Advice to Company or Institution – if the company or the individual does not agree with the designated rating given or assigned by the committee, they can file for an additional step, an appeal, which will then be resubmitted to the Rating Committee for re-evaluation and re-assignment if the appeal is granted.
- Publication – for businesses, this is when the ratings are publicly announced (to at least its employees, etc.)
- Surveillance and Annual Review – after the surveillance and annual review, the process goes back to step 2, where data are gathered again and analyzed for another rating, if possible.
What are the business risks?
Economic Risk – this is based on the current economic situations and trends. For businesses, it is a gauge of how, in spite difficult external factors, can the company or the borrower have the ability to pay off debt.
Market Position – this factor includes an assessment of the business’ quality, pricing power, and other factors that will directly affect its growth.
Industry Risk – this includes the analysis of the current industry competition and how the current industry trends may affect the business’ financial health as a whole.
Business Diversification – How far is the customer reach of a business? This is the question that is asked by business diversification. This also includes the different products that the business can offer to different demographics.
Management and Strategy – this is considered based on the effectiveness of the business management. It can also be based from the business plan and strategies presented to the bank upon application for credit.
What are the financial risks?
Earnings Generation – this is applicable both for businesses and individuals. This includes the stability of the income and the long-term earning potential of a company or individual. This is the reason why, in the advent of call centers and call center “hoppers,” requirements are different for call center agents. Some banks require a minimum uninterrupted stay of 2 years in one company. As in the US, the employment status and tenure of a borrower is also considered.
Cash Flow and Liquidity – this is defined by how the borrower’s sources of funds can meet the monthly or periodic payments required by the lender. Individuals for example, may have a side job that can additionally provide income, and this can also be considered in the process.
Capital Structure/ Leverage – this lets the lenders know how the borrower’s finances are going to be split between other lenders, if any. In the US for example, a particular credit card account is asked by a lender to be closed or cancelled to reduce the borrower’s financial obligations. Although it may not be as severe here in the Philippines, this is also looked into, especially if there are other maturing loans from other financial institutions, including publicly-funded ones (like SSS and GSIS.)
Financial Flexibility – this is the ability of the company or the individual to create funding when unexpected demands arise. These are usually non-monetary in nature, like the franchise value of a business, the savings and reserves meant for emergency funds, other assets, and the ability to gain support from the government and other private institutions. For individuals, this may include properties and other assets that can be translated into monetary value.
Asset Quality – this is the overall quality and reliability of an individual or the business to grow and further operations. This may include receivables, balance sheets, investments, securities, and other portfolio information.
These are the different factors that are taken into consideration before credit is granted to an individual or business. The factors may slightly differ and some may not be applicable for personal applications, but the process is still the same.
If you intend to build your credit for future use, make sure that any financial obligation granted to you is settled religiously. This includes not just credit cards and loans, but also bills and other finances. Stay on top of your credit by ensuring that all payments are made on time to avoid credit hassles in the future.