PROCEDURE OF RATING MODEL DEVELOPMENT

Abstract

Rating models have irreplaceable role in each credit appraisal. The intention of this article is to present development of rating model methodology used for assessment of creditworthiness for businesses. The reliability of the rating model depends largely on the quality of the rating model development, which is very complicated. Prior to rating model development, it is necessary to define rating segments and methods in use. The development itself starts with generating of the data sets, which is used in the next step for development of rating function using selected method. The whole process is closed up with the transformation of scoring values into the probability of default which is an important requirement according to Basel II. Proposed rating model then goes through validation process. It is very important to pay attention to each phase of rating model development, while failing in any way would have essential impact on suitability of given rating model for creditworthiness assessment of businesses. Here described procedure could be widely used for development of prediction models especially for predicting of business financial situation not only in banks, but also in economic theory and practice.