Archive January 2019

Loan Scoring Credit Credibility in a Pill

Credit scoring – banking is your creditworthiness towards the bank

Credit scoring - banking is your creditworthiness towards the bank

Every financial institution that lends money and, above all, banks checks creditworthiness of a potential client. In this way, the Bank assesses the risk of possible problems with recovering borrowed funds in the form of cash.

What is the bank scoring?

What is the bank scoring?

A credit scoring or banking scoring method uses a statistical tool to assess the credibility of a given borrower and to predict the probability that he or she will have problems with the timely delivery of borrowed money. Scoring is nothing else than the credit risk assessment method and one of the types of creditworthiness analysis.

Put simply, the profile of a potential customer is compared to the profile of another person who has received a loan or a loan. The final result has a point form, so-called application scoring . The number of points is higher and close to the result of the person paying the debt due on time, the applicant is a less risky client for the bank, and thus – the financial institution is more willing to provide financial support in the form of credit or other product requested by the bank . A high score (score) means a higher probability that a given client will be able to credit the loan in a timely manner, while the total number of points earned results in better credit conditions such as a better lower margin.

The banks have to use banks for such a duty, the PFSA imposes on them otherwise it is in the case of loan companies that they may or may not use such a method. It is up to the owners and management boards of such companies to decide how rigorously they will check their clients and how much risk they are able to incur. In addition, loan companies also have much greater freedom in setting various additional fees, in particular, for debt recovery activities and a greater scope for applying various “non-standard” actions to their unreliable debtors in order to enforce the debt. These companies also additionally secure themselves, one of them is the requirement to sign a blank promissory note, which is used at the right moment in the absence of funds to repay the loan.

Scoreboard or scoring card – what is it?

Scoreboard or scoring card - what is it?

The scoring card is a tool for assessing the credibility of applicants and is defined as a set of points assigned to the attributes of all selected features describing the client. In other words, it is a data set that is taken into account in the analysis of credit scoring.

Scoreboard – Scoring card

Data analyzed for banking scoring assessment:

  • profession
  • education
  • nationality
  • housing status
  • number of people in the household
  • residence period at current address
  • amount of monthly income
  • employment period in the same company
  • type of employer with whom we are employed (eg Joint Stock Company, LLC or small entrepreneur)
  • position held
  • period of employment in the current position
  • type of employment (fixed-term or indefinite contract, etc.)
  • total work experience
  • having a telephone
  • age and marital status
  • bank accounts
  • having life insurance
  • owning a car
  • held payment cards
  • owning property (real estate or cash)

and many other more or less detailed data.

We divide credit scoring into two types

Application scoring – customer evaluation for a given moment based on data from the client – main sociodemographic features.

Behavioral scoring – historical assessment based on data from the bank’s own databases, analyzing the history of client’s cooperation with the bank.

What determines the type of scoring?

First of all – bank’s policy, type of product, data availability, bank’s experience.

Scoring analysis

However, let’s return to the scoring analysis performed by the bank. The result obtained on the basis of data from the loan application and other data is compiled with the scoring table. When the result has not reached the minimum level, then the bank makes a negative credit decision .

In the situation when the scoring slightly exceeded the lower limit, then the lender – bank should be expected to request additional security or guarantee of the liability. This may also result in a reduction in the amount of the loan. In exceptional situations, when the financial institution depends on the client because he is a long-term regular opinion-forming customer, etc., the bank may apply the so-called breaking the scoring by means of various product exceptions, under strictly defined conditions towards the client, eg by paying a certain amount of the deposit to a bank account with a blockage of funds for a predetermined time. It should be noted that every bank scoring is a dynamic value, it is constantly changing, from time to time banks tighten their scoring internally or loose its parameters in relation to its internal lending policy and the current market situation in relation to loan demand, which involves large campaigns in the form of campaigns credit. This is evidenced by common advertising banners on the streets or advertisements on TV that bombard us with promotions and encourage us to submit a loan application in a specific financial institution.

Scoring uneven scoring

Of course, each bank uses its own scoring system , which is determined mainly by the internal unit which is the Risk Department. This unit assesses the current loan portfolio and decides whether or not to change the parameters. Therefore, there may be a situation where one institution refuses to grant a loan and in the other one the application will be considered positively. One bank may have a greater risk appetite as opposed to another which does not need to aggressively build its loan portfolio aggressively to its own internal lending policy and is very cautious about it.

“BIK” and its credit scoring The scoring model based on two forms:

  • using asterisks (from 1 to 5)
  • interval range from 192 to 631 points

In addition, the BIK assessment model is divided into: behavioral, statistical, multi-plane – 5 segments and model efficiency. Financial institutions can use this model for a fee.

Benefits of using the scoring for the bank?

  • streamlining the decision-making process – automation
  • reducing the subjectivity of credit decisions
  • decrease of “bad” loans
  • increasing the acceptability of applications
  • including in the client’s assessment more elements than before

Scoring – where is it used?

Scoring - where is it used?

Scoring was and is used not only by banks or loan companies, but also by issuers of various types of credit, club and travel cards. Similar methods are also used in marketing and insurance, and even in medical diagnostics.

It is perfectly normal to check the creditworthiness of a potential borrower or borrower. Financial institutions take care of their money. Banks have an obligation to do this because the amounts borrowed come from money that other clients entrusted to them in the form of deposits, eg in the form of a bank deposit. Therefore, strict requirements, a huge amount of formalities, because the bank wants to show maximum diligence when granting a loan or a loan than to have problems with a given commitment, which is not repaid on time.