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Content
Credit Scoring as a key element of the Credit Granting Process
Credit Scoring Introduction
Judgmental vs. Statistical Decision
Statistical Scoring Methodology
Credit Scoring Typology
Credit Scoring Data Sources
Credit Scoring Risks
Conclusion
… Credit and behavioural scoring are some of the most important forecasting techniques used in the retail and consumer finance area……. With the connections being made between scoring for default and scoring for targeting potential sales, the scoring techniques will clearly be used to forecast the sales of products as well as the profit a company will make in the future….
Source: A survey of credit and behavioural scoring: forecasting financial risk of lending to consumers - Lyn C. Thomas* - Department of Business Studies, University
of Edinburgh,
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Retail Consumer Credit Lending Process
Application data collection Verification Pre-scoring
calculationInternal decision
Additional documents collection
Public Bureau data collection
Credit Bureau data collectionCredit scoring
Credit Risk strategy decision
Risk premium calculation
Final credit decision
Credit agreement signature
Credit account opening
Disburse money order
Manual tasks
Engine tasks
Combination
Reject
Continue
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Micro Finance Credit Lending Process
Credit product promotion
Interest of potential debtor
Detailed product
description
Application form
Pre-scoring and internal decision
Public & Non-Financial data
collection
Credit Bureau data files Collection
Data entry Credit scoringRisk Premium and collateral
calculation
Credit committee and
loan analysis
Final loan decision
Client approval announcement
Client signature and collateral authorization
Paperwork finalization
Disburse finance funds
Regular follow up
Behavioural credit scoring
On-time collection
Late payments procedure
Credit Bureau score
Soft Collection procedure
Late Collection procedure
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Credit Scoring Introduction
Credit scoring is a statistical-based technology that quantifies credit riskPrimary goal is to rank individuals, distinguishing lower and higher risks
Credit scoring was developed in order to provide quick, accurate, inexpensive and consistent credit evaluation
Credit history or “bureau-based” scores are based exclusively on credit record data from credit reporting agencies
Credit scores are widely used to:evaluate and price credit based on Probability of defaultidentify prospective borrowers for acquisitionmanage existing clients and its accounts
Scoring is heavily used in banking, consumer finance and insurance, and also in employment, utilities and marketing
JUDGMENTAL vs. STATISTICAL
???
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Decision: Statistical vs. Judgmental Scoring
BOTHAssume that the future will resemble the pastCompare applicants to past experienceAim to grant credit only to acceptable risks
STATISTICAL SCORE ADDED VALUE Defines degree of credit risk for each applicantRanks risk in relation to other applicantsAllows decisions based on degree of riskEnables tracking of performance over timePermits known and measurable adjustmentsPermits decision automation
Age
Income
Marital Status
Household
…..
# of Credit Aplications 6M
% of Avg. Credit Lines Usage
……
Total
_____________
Decision
PD
+
-
+
+
…..
-
+
……
+
______
Accept
??
10
5
7
4
…..
28
23
……
135
______
Accept
2,8%
EVALUATED VALUES JUDGMENTAL STATISTICAL
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Comparison of Individual Credit Processes
Average processing time (minutes) Variables required (data fields) Average costs per application (USD) Accuracy (Delinguent cases /1000)
0
50
100
150
200
250
300
350
400
450
500
Performace Figures
Standard Credit Loan Granting Process with Judgmental Decision Credit Loan Granting Process with Financial and Non Financial AnalysisCredit Loan Granting Process with Credit Scoring Based Decision
Source: MFI pool Research
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Statistical Scoring - Methods
LINEAR REGRESSION
LOGARITHMIC REGRESSION
CLASSIFICATION TREES
RECURSIVE PARTITIONING ALGHORITMS
LINEAR PROGRAMMING
NEURAL NETWORKS
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Credit Scoring Typology
Application Score - Application scores are a type of credit score used by banks and finance houses to decide which applicants are to be taken on, based purely on the information given in the credit application form. This scoring is heavily used during the acquisition period of a credit life cycle.
Bureau Score - A Bureau Score is a credit score which is calculated only based on the information from a detailed credit report. Sometimes there is a mixture of private and public credit reports used to obtain the „bureau score“. This scoring is heavily used during acquisition, monitoring and collection periods of a credit life cycle.
Behavioural Score – This is limited to existing client portfolio of a bank or a finance house. This score allows lenders to make better decisions in managing existing clients by forecasting their future performance. This score is heavily used for credit limit renewal, credit limit increase, up-selling, cross-selling and also for the soft collection period of a credit life cycle.
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Credit Scoring Data Sources (Retail)
Credit application
Banking credit history
Banking deposit history
Credit bureau report
Public bureau reportPublic debtor databasesRegister of pledges
Demographics
Billing file
Deal terms
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Concerns over Credit Scoring Influence on the Credit Granting Process
Credit scoring may have adverse effects on certain populations, particularly minorities
Credit scoring is not loss prevention panacea and it is neccessary to keep that in mind during credit lending process definition and design
Some factors used to estimate credit scores may have an adverse effect on certain groups
Automated technologies may disadvantage individuals with nontraditional credit experiences
Judgmental evaluations may be better able to detect errors or inaccuracies
With lending and retailing becoming more automated, risky consumers will face growing disadvantages and this may lead to some acting in the name of social justice
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ConclusionThe Credit Lending Industry is an area, where RISK is the norm rather than the exception
It is necessary to adopt many measures which may help to reduce exposure to high risk
Those who would like to win the market battle have to find a balance between risk and return on assets
Credit scoring is a pragmatic and widely proven method of risk identification and quantification
The statistical credit scoring model is much more powerful than a judgmental opinion and decision
The use of credit scoring during loan providing and monitoring is an essential feature of a modern bank and its implementation costs are quickly recovered
Companies that are confident in their models, will start cherry picking and can target the most profitable customers.
www.arbes.com
Thank you for your attention
Tomáš DenemarkFinancial Systems & Enterprise Applications Director
ARBES Technologies, s.r.o.+420 724 096 [email protected]. Arbes.com
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