1. CREDIT SCORING  It is better to count than to guess
Tomáš Denemark
KIEV, September 2012
www.arbes.com

2. Content
Credit Scoring as a key element of the Credit Granting Process
Credit Scoring Introduction
Judgmental vs. Statistical Decision
Statistical Scoring Methodology … Credit and behavioural scoring are some of
Credit Scoring Typology the most important forecasting techniques used
in the retail and consumer finance area…
Credit Scoring Data Sources …. With the connections being made between
scoring for default and scoring for targeting
Credit Scoring Risks potential sales, the scoring techniques will
Conclusion 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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3. Retail Consumer Credit Lending Process
Application Pre-scoring Internal
Verification
data collection calculation decision
Additional
Credit Bureau Public Bureau
Credit scoring documents
data collection data collection
collection Continue
Reject
Credit Risk Credit
Risk premium Final credit
strategy agreement
calculation decision
decision signature Manual tasks
Engine tasks
Disburse Credit account
money order opening Combination
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4. Micro Finance Credit Lending Process
Detailed Pre-scoring and Public & Non-
Credit product Interest of Application
product internal Financial data
promotion potential debtor form
description decision collection
Credit Bureau Risk Premium Credit
Final loan
data files Data entry Credit scoring and collateral committee and
decision
Collection calculation loan analysis
Client signature
Client approval Paperwork Disburse finance Regular follow Behavioural
and collateral
announcement finalization funds up credit scoring
authorization
On-time Late payments Credit Bureau Soft Collection Late Collection
collection procedure score procedure procedure
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5. Credit Scoring Introduction
Credit scoring is a statistical-based technology that quantifies credit risk
Primary 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 default JUDGMENTAL vs. STATISTICAL
identify prospective borrowers for acquisition
manage existing clients and its accounts
Scoring is heavily used in banking, consumer
finance and insurance, and also in employment,
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utilities and marketing
???

6. Decision: Statistical vs. Judgmental Scoring
BOTH
Assume that the future will resemble the past
Compare applicants to past experience
Aim to grant credit only to acceptable risks
EVALUATED VALUES JUDGMENTAL STATISTICAL
STATISTICAL SCORE ADDED VALUE
Age + 10
Defines degree of credit risk for each Income - 5
applicant Marital Status + 7
Ranks risk in relation to other applicants Household + 4
….. ….. …..
Allows decisions based on degree of risk
# of Credit Aplications 6M - 28
Enables tracking of performance over time % of Avg. Credit Lines Usage + 23
Permits known and measurable …… …… ……
adjustments Total + 135
_____________ ______ ______
Permits decision automation Decision Accept Accept
PD ?? 2,8%
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7. Comparison of Individual Credit Processes
Performace Figures
500
450
400
350
300
250
200
150
100
50
0
Average processing time (minutes) Variables required (data Average costs per application Accuracy (Delinguent
fields) (USD) cases /1000)
Standard Credit Loan Granting Process with Judgmental Decision Credit Loan Granting Process with Financial and Non Financial Analysis
Credit Loan Granting Process with Credit Scoring Based Decision
Source: MFI pool
Research
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8. Statistical Scoring - Methods
LINEAR REGRESSION
LOGARITHMIC REGRESSION
CLASSIFICATION TREES
RECURSIVE PARTITIONING ALGHORITMS
LINEAR PROGRAMMING
NEURAL NETWORKS
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9. 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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10. Credit Scoring Data Sources (Retail)
Credit application
Banking credit history
Banking deposit history
Credit bureau report
Public bureau report
Public debtor databases
Register of pledges
Demographics
Billing file
Deal terms
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11. Page 11

12. 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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13. Conclusion
The 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.
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14. Thank you for your attention
Tomáš Denemark
Financial Systems & Enterprise Applications Director
ARBES Technologies, s.r.o.
+420 724 096 904
tomas.denemark@arbes.com
www. Arbes.com
www.arbes.com