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Credit Scoring: is it right for your bank?
Credit scoring is a scientific method of assessing the credit risk associated with new credit applications. Statistical models derive predictive relationships between application information and the likelihood of satisfactory repayment. Models are empirically designed; that is, they are developed entirely from information gained through prior experience. Therefore, credit scoring is an objective risk assessment tool, as opposed to subjective methods that rely on a loan officer’s opinion. Clearly, credit scoring is a risk management tool. Scoring systems can help a bank ensure more consistent underwriting and can provide management with a more insightful measure of credit risk.
This document aims to provide a road map of the steps needed to design, implement and monitor a custom credit scoring model. It is not a step by step manual of the tasks required to introduce a credit scoring system in a bank. The authors draw on their experience of developing a system for a large Baltic bank. They point out that if a bank has fundamental problems such as inexperienced loan officers, inadequate procedures, persistent arrears, etc., then credit scoring will not be a priority.
If credit scoring is thought to be an appropriate tool, the six steps a consultant might follow when advising the bank management are:
- Present the concept
- Gather data to assess if scoring would fit in to the bank’s procedures
- Put together a steering committee to discuss strategic and technical issues
- Design and pilot test the model
- Analyse results, draft procedures and provide introductory training
- Monitor and provide follow-up training
This is a useful paper for consultants and advisers involved in improving risk management procedures in banks.
- Resource type Paper
- Author Caire, D.; Kossmann, R.
- OrganisationBannock Consulting
- Year of Publication2003
- RegionGlobal
- LanguageEnglish
- Number of pages12 pp.