Comparative analysis for prediction of insolvency of a bank credit portfolio composed of medium-sized companies

Abstract

The Brazilian credit market has been characterized by increasing finance concessions to companies, and concurrently, failure to pay on the part of these debtors. Therefore an analysis was made of three risk management indicators to compare signals for increased risk of solvency, one or two years before the fact, when applied to a credit portfolio comprised of 80 medium-sized companies from different sectors. The three indicators used were the portfolio credit risk classifications by a major private Brazilian bank and by the Brazilian Federal Reserve for operations in arrears as a well as the paradigm for insolvency provision, Model M & S, developed by Minardi and Sanvincente. Results disclosed divergencies on portfolio solvency alerts by the three indicators in relation to the effective risk classification of each individual company according to the bank. In conclusion a strong recommendation was made to work with the largest number of indicators and information sources possible so as to minimize such a risk of insolvency.