Financial Modeling

Financial modeling for a Credit Guarantee Scheme (CGS) involves creating a detailed, quantitative framework to evaluate the scheme's financial sustainability, risk exposure, and potential economic impact. These models address key aspects like the structure of guarantees, expected default rates, fees, operational costs, and capital adequacy.


Objectives of the Financial Model
  1. Assess Financial Viability: Evaluate whether the CGS can meet its financial obligations over time. 
  2. Estimate Risk Exposure: Quantify the potential losses due to borrower defaults. 
  3. Pricing Analysis: Determine appropriate guarantee fees for sustainability. 
  4. Policy Impact: Estimate the economic impact, including SME growth and job creation
Financial Modelling
Key Components of Financial Models
A. Input Variables

Guarantee Terms:

  1. Coverage ratio (percentage of loan covered by the guarantee). 
  2. Loan size and tenure.
Portfolio Metrics:

  1. Expected number of guarantees issued. 
  2. Loan disbursement rates. 

Default and Recovery Rates:

  1. Default probability (% of loans expected to default). 
  2. Recovery rate (% of defaulted loan amounts recovered).

Fee Structure:

  1. Guarantee fees (annual or upfront, as a % of the loan amount). 
  2. Administrative fees (if any).

Operational Costs:

  1. Staff salaries
  2. Marketing
  3. IT infrastructure, etc.

Economic and Financial Assumptions:

  1. Inflation
  2. Interest rates
  3. Economic growth projections.


B. Core Calculations

Loan and Guarantee Portfolio:

  1. Calculate the total value of loans disbursed and guarantees issued. 
  2. Track the portfolio over time (e.g., monthly or yearly).

Default and Recovery Projections:

  1. Estimate the total amount of defaults based on the default rate and loan value. 
  2. Calculate recoveries from defaulted loans using the recovery rate. 

Loss Estimation:

Compute net losses = (Defaulted amount × Coverage ratio) − Recoveries.

Fee Revenue:

Total fees collected = Guarantee fees × Loan value.

Reserve Fund Balance:

Initial reserve balance.

Additions:

Fees and government/partner contributions.

Deductions:

Loss payouts and operational costs.


C. Financial Metrics

Loss Ratio:

(Net losses / Guarantee exposure) × 100.

Sustainability Ratio:

Fee revenue / (Loss payouts + Operational costs).

Capital Adequacy Ratio:

Reserve fund / Maximum liability.

Cost-to-Income Ratio:

Operational costs / Fee revenue.


Scenario and Sensitivity Analysis
Scenario Analysis:

  1. Best-case: Low default rates, high recovery rates. 
  2. Base-case: Average defaults and recoveries based on historical data. 
  3. Worst-case: High default rates, low recovery rates. 
  4. Sensitivity Analysis: Impact of changes in default rates, fee levels, and coverage ratios on financial sustainability.


Outputs of the Model
Financial Statements:

  1. Income statement: Revenue, costs, and net surplus/deficit. 
  2. Balance sheet: Reserve fund, liabilities, and equity. 
  3. Cash flow: Inflows (fees, contributions) and outflows (payouts, costs). 

Risk Exposure Dashboard:

  1. Total guarantees issued. 
  2. Outstanding liability. 
  3. Risk-adjusted reserves. 

Performance Metrics:

  1. Profitability: Net surplus/deficit. 
  2. Efficiency: Cost-to-income ratio. 
  3. Resilience: Capital adequacy and loss ratios.


Tools and Software
Spreadsheet Software:

Build the model in Excel or Google Sheets for flexibility.

Financial Modeling Platforms:

Use specialized tools like R, Python (with Pandas and NumPy), or financial modeling software for complex analyses.

Visualization:

Create dashboards using tools like Tableau, Power BI, or Excel charts.


Validation and Review
Stress Testing:

Validate the model under extreme scenarios to ensure robustness.

External Review:

Engage financial analysts or auditors for independent validation.

Continuous Updates:

Revise the model based on actual performance data and economic changes.

Back To Top