Credit Scoring Model for Auto Ancillary Sector

Abstract—The Indian auto component industry has been passing through a period of rapid development in its structure and competition. Global competition and the recent shift in focus of global automobile manufacturers, dynamic changes in business rules and liberal policies of the government of India are driving factors. The global auto components industry is estimated at US$1.2 trillion. The Indian auto component sector has been growing at 20% per annum since 2000 and is projected to maintain the high-growth phase of 15-20% till 2015.It is estimated that production of auto ancillaries at US$10 bn in 2005-06 and has been growing at a robust 20% per an num since 2000. Exports of auto components have been strong growing at 24% per annum since 2000. This growth in exports if sustained for another five years will see India’s auto components exports will touch US$ 5 bn by 2011 from the US$ 2bn at present. Since 2000, the auto component industry has recorded an investment level of Rs 18 bn and has attracted US$ 530 mn in terms of foreign direct investment. Investments in the sector have been growing at 14% per year. In 2005-06,investments touched US$ 4.4 bn, and are expected to grow significantly in future. The Investment Commission has set a target of attracting foreign investment worth US$ 5 bn for the next five years to increase India’s share in the global auto components market from the present 0.4% to 3-4%. This is a sizeable target considering the meager amount of FDI currently coming into the industry. The changing perception of global auto makers is however fast altering this scenario. This emerging scenario has brought several opportunities and challenges for investors, financial institutions, banks and other NBFCs’. Every investment is associated with certain risk. Assessment of risk is an important part of the credit risk management of every commercial bank and also NBFCs’ which are extending credit to these auto ancillary company which are part of Small and Medium Enterprise segment of growing industry. The objective of the research was to design and develop a credit scoring model to evaluate the creditworthiness of the lease applicants from Auto Ancillary sector. The existing credit appraisal methods which are very subjective in nature and also very time consuming due to unknown significance of factors involved in the rating process. This justifies the need of a credit scoring model. Initially, the applicants were classified into three categories based on the credit rating given by the company– Low, Moderate, and High Risk category. Various financial and non-financial risk factors were identified and a model was built using Multiple Discriminant Analysis with the data obtained from 50 samples (Lease applicants). The idea was to classify the new applicants based on their discriminant scores obtained using the new model built. The model was validated using the data obtained from 20new samples. The classification accuracy of the model was 90%.Therefore, the model built was considered highly reliable. The key factors that determined the risk category of applicants was identified. It can be concluded that the new model is highly reliable and could help credit officers to make objective decisions. The new model can be fine-tuned further by including additional relevant factors, which could be an effective supporting tool to measure the credit worthiness of the lease applicants.

Index Terms—Auto Industry, Credit, Discriminant Analysis. Risk Classification

Srinivas GumparthiSSN School of Management & Computer Applications, Chennai–603110. India, email:srigumparthi@gmail.com ; srinivasg@ssn.edu.in
Dr.V.Manickavasagam Professor & Controller of Examinations,Department of Corporate Secretaryship, Alagappa University, Karaikudi,India (email:drvmalucorp@yahoo.com).
M. Ramesh SSN School of Management

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Cite: Srinivas Gumparthi, Dr. V. Manickavasagam and M. Ramesh, " Credit Scoring Model for Auto Ancillary Sector," International Journal of Innovation, Management and Technology vol. 1, no. 4, pp. 362-373, 2010.