Developing a credit risk scorecard for 4 and 5 star hotels

Abstract

Purpose: The scope of the study is to try to develop a Credit Risk Scorecard for the local 4- and 5-star hotels. In doing so, this research is set out to identify the best Key Risk Indicators (KRIs) and Key Performance Indicators (KPIs) to be used to test the hotels business liquidity position and performance. Obtaining an understanding of the Industry's environment and identifying non financial questions to use to test the hotels' management attitude and reliance are also part of this research objective. Design: A Deductive approach was used in the determination of the various elements that comprise the scorecard. The elements were selected according to the findings derived from semi-structured interviews and questionnaires with hotel managers and credit risk analysts. The final scores for the scorecard were obtainable via the use of the normalization technique. Findings: The findings indicate that quantitative elements are given more importance in the analysis of a credit application. Cash Flow was indicated as being the major KRI which signals financial distress for hotels. In the credit granting process the major concern of bank credit analysts is the assessment of the feasibility of repayment by the applicant. The use of financial ratios in the analysis of a credit application is deemed not to be insufficient on its own, and a qualitative perspective is necessary for a complete fair assessment. Conclusions: The scorecard revealed to be a very helpful tool for the credit risk analysts. The way it is structured enables easy interpretations and quick comparisons. Value: This study is the first to develop a Credit Risk Scorecard specifically for the 4- and 5-star hotels in Malta.