Measuring Probability of Default – How to Evaluate Credit for Consumer Lending
Lenders make profits if borrowers repay the amount financed with interest. To minimize their risk, lenders need to identify borrowers least likely to default on their loans. The objective of credit evaluation is to determine the probability of default based on available sources of information. Lenders and researchers have spent a large amount of time and effort in building sophisticated algorithms for credit evaluation. Some of them are too complex to implement, others require a lot of manual effort making it unfeasible for consumer lending. In the consumer lending business, deal sizes tend to be small (micro ticket), requiring quick turnaround times. Credit evaluation models need to be implemented keeping in mind ticket size and turnaround time. In some markets, accessing reliable information for credit evaluation is a challenge.