Development of the Model for the Creditworthiness Analysis in Russian Metallurgy

To minimize credit risks, banks must first analyze the financial condition of a potential borrower and evaluate their creditworthiness. The technique used for this purposes should be comprehensive, accurate and reliable. However, criticism of existing approaches to assessing creditworthiness is often associated with their lack of flexibility and absence of industry-specific approach.

The metallurgical industry is very important for the Russian economy. Many organizations operating in related industries consume the metallurgical production, and the products themselves have a significant share in national exports. Russian metallurgical organizations are leaders not only in the domestic, but also in the global market.

The concepts of credit risk, insolvency and creditworthiness were studied. The milestones of assessing the creditworthiness of organizations were considered, the evolution of approaches to valuation was presented during the second half of the last century and to the present moment. A brief overview of existing banking practices is provided.

The financial performance of Russian metallurgic enterprises were analyzed. Particular attention is paid to the review of industry leaders as examples of the most sustainable organizations. Based on the reporting data, the characteristics of financial indicators and capital structure inherent in the industry were identified.

The process of creating the methodology for assessing creditworthiness, which would take into account the characteristics of metallurgical organizations, is presented. A compilation of financial ratios for analysis was selected, the probability of bankruptcy was estimated for each company in the sample. Based on panel data on 35 companies for 2014-2018, through using a logistic regression, a scoring model was built to assess the creditworthiness of metallurgical organizations.
The result of the work was an express methodology that allows to assess the creditworthiness of a metallurgical organization quickly and transparently, and at the same time, with sufficient accuracy, taking into account industry specifics.