only need to be made in respect of gray area loans or proposals which are neither an unqualified “ yes ” or an unqualified “ no ”. on the contrary, credit rating requires a similar level of credit analysis for all loan applications and is more comprehensive in nature, hence increasing the transaction cost per loan. f. how scoring model works? 18. the objective of a scoring model is to use a relevant and representative sample to measure loan performance and then develop characteristics that predict performance. the resulting model is integrated into the decision making process. a scoring model applies different weights to the characteristics used to predict the performance. the weights, or values, measure the influence of that characteristic on the outcome. the weights and the level of influence are determined by statistical analysis. only those characteristics that exert a “ significant ” influence are included in the final model. the score allocated to any application is the sum of the appropriate weights given by the values that the included characteristics take for that application. under this model, any two identical applications will always receive the same score, unlike in the manual underwriting where the decision could change from one lender to the other or also by the same lender depending on the interpretation on a given day. g. benefits of credit scoring 19. when used appropriately, credit scoring can benefit multiple stakeholders, including lenders, borrowers, and the overall economy. for the lender, scoring leads to process automation which facilitates process improvements leading to many by products such as improved management information, control and consistency. it also increases the profitability of sme lending by reducing the time and cost required to approve loans and increasing revenues by expanding lending opportunities as lenders can safely approve marginal applicants that an individual underwriter might reject. international evidence has shown that credit scoring can assist in overcoming the inherent benefit / cost trade - off that banks face when deciding whether or not to invest in obtaining information regarding a potential borrower. a study that was meant to test the credit scoring situation in us estimated that the cost of evaluating micro loan applications in the us using credit scoring was reduced to around $ 100 compared to a range of $ 500 – $ 1800 prior to the introduction of credit scoring. the time saving involved meant that banks could focus more time on marginal applications, existing loans that are showing signs of distress and processing more loan applications. use bis central bankers ’ speeches of credit scoring has also meant that the marginal benefits of taking and maintaining collateral are not justified for small loans. 20. the

plan ( external and domestic funding, instruments, maturity structure, etc. ) provides requisite direction to the debt management operations. its articulation imparts information and transparency, certainty and enables market participants ( investors ) to chalk out their investment strategy in the g - sec market. our dms revolves around three broad pillars viz., cost minimization, risk mitigation and market development. cost minimisation 12. cost minimization is sought to be achieved over medium to long run by formulating appropriate issuance strategy and developing financial markets. the borrowing needs are estimated and amounts are borrowed in timely fashion thereby minimising the opportunity cost. proper demand estimation, planned issuance and offer of appropriate instruments would aid in lowering costs. in india, the issuance calendar for market borrowings is announced in advance for each half year with details of the quantum to be borrowed each week, maturity buckets, etc. a week prior to the auction, individual securities along with their issuance size is notified to public. this strategy of sharing information about debt management has enhanced transparency of debt management operations. the borrowings are planned keeping in view the investment preferences / horizons of various investors. as commercial banks are large investors in g - sec and are interested in short / medium tenor bonds, substantial issuance is in this tenor. longer tenor bonds are issued keeping in view demand from insurance companies and provident funds. it may be noted that cost minimisation objective refers to the planning horizon of debt management as minimizing costs at any point in time is different from minimizing costs over a longer time horizon. what might seem cost - efficient today may prove rather costly over a number of years. it is exactly the acknowledgment of this distinction that would help mitigate the alleged “ dilemma ” of minimizing costs while containing risks. the cost minimization attempted over short - term by the debt managers may create sub - optimal debt structures, which may create stress for issuer by enhancing refinancing risks as was seen during the recent european sovereign debt crisis. recognising the need for appropriate debt portfolio structure, we have desisted from issuance in short tenors as debt maturing in ten years constitutes nearly 60 per cent of total debt. risk mitigation 13. the sovereign debt portfolio is exposed to rollover risk, currency / exchange rate risks, sudden - stop risks and interest rate risks which need to be managed. rollover