Scoring model for assessing the borrower's creditworthiness

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Practically everyone who has ever been denied a loan has heard the following phrase from the manager: “The decision was made by the scoring system. Your credit scores as a borrower are not up to par.” What is this norm, what is scoring and how to pass the “credit detector” with “excellent”? Let's try to figure it out.

General information

So what is scoring? This is a kind of system for assessing the reliability of the borrower, built on a number of parameters. When a person applies for a loan, the first thing they are asked to do is fill out a form. Questions of the questionnaire were invented for a reason. This is the scoring model for evaluating a potential borrower. Depending on the answer, each item is assigned a certain number of points. The more of them, the higher the probability of obtaining a positive decision on the issuance of funds.

There is one caveat here. If you have a negative credit history, then further answers to questions and the number of points scored most often no longer havevalues. This fact alone is enough to refuse.

Goals and objectives of scoring in modern banks

Any scoring model used in the lending system is introduced in order to obtain the following results:

• an increase in the loan portfolio due to a decrease in the proportion of unjustified refusals on loans;
• acceleration of the procedure for assessing a potential borrower;
• decrease in loan default rates;
• improving the quality and accuracy of borrower assessments;
• centralized accumulation of customer data;
• decrease in the provision for the amount of probable losses on loans;
• assessment of the dynamics of changes in an individual credit account and the entire loan portfolio as a whole.

Credit scoring: how does it work?

To achieve the set goals, banks use a scoring model for assessing creditworthiness. It assumes minimal influence on the result of the biased attitude of the manager or the collusion of bank employees.

Practically all information entered into the questionnaire must be confirmed by the availability of documents. The bank manager plays a purely technical role in this case - he enters data into the program. When all the points of the questionnaire are completed, the computer program calculates and gives the result - the number of points you have scored. Further, the situation may develop in different ways.

If you scored too few points, you can be sure that the loan will be denied.

Are your scores much higher than average? If the loan amount is small,can be taken right on the spot. If you are applying for a rather impressive amount, you will be informed that you have passed the first stage of verification, and the application has been submitted for consideration to the bank's security service.

Does the score float in the middle? The manager will most likely require a guarantor or a series of additional checks.

Types of scoring

In general, the scoring model consists of seven types of assessment, four of which are related to lending, and three - to marketing. The following types of scoring are typical for credit practice:

1. According to applications (Application-scoring). This model is most often used to assess the reliability and solvency of customers. It is built, as already mentioned, on evaluating the questionnaire and assigning each answer the appropriate number of points.
2. From fraud (Fraud-scoring). It helps to identify potential scammers who managed to pass the first stage of testing. The principles, methods and methods of testing for fraud are the commercial secret of each bank.
3. Behavioral scoring. Here, an analysis of the borrower's behavior in relation to the loan is carried out, the likelihood of a change in solvency. Based on the evaluation results, the maximum loan amount is adjusted.
4. Work on returns (Collection-scoring). This model is applied to problem loans, at the stage of repayment of outstanding debts. The program helps to form an action plan for repaying a loan: from warning to transferring the case to court orcollection firm.

The other three look like this:

1. Pre-sale evaluation (Pre-Sale) - identifies the potential needs of the borrower, allows you to offer an additional product.
2. Response (Response) - evaluates the probability of the client's agreement with the proposed lending programs.
3. Assessment of attrition (Attrition) - an assessment of the likelihood that the client will terminate his relationship with the bank at this stage or in the future.

Disadvantages of the scoring system

Credit assessment of individuals has its drawbacks. The main thing is that the system is not flexible enough and does not adapt well to real parameters. For example, the scoring model adopted in the United States will give a high score to a person who has changed a large number of jobs. Such a person is considered a wonderful specialist, very in demand in the labor market. With us, this fact will play a cruel joke with the borrower. The highest number of points will be received by a person who has only one record in the labor. If the borrower often changes employer, then he is considered unreliable, quarrelsome and a poor specialist. His rating in the eyes of the bank is rapidly falling, because the next dismissal may not be followed by a new job, which means that delays in payments will begin.

In order to adapt the system as much as possible to our living conditions, assessment questionnaires should be developed by specialists of the highest category and qualifications. But any results obtained in this way are stillwill depend on the opinion and influence of a person. So an absolutely impartial assessment is still not obtained.

So any scoring system has at least two drawbacks:

• high cost of adaptation to modern realities;
• the influence of the subjective opinion of a specialist on the choice of a client assessment model.

Besides, the grading system itself is also imperfect. The fact is that when scoring, only the formal state of affairs is taken into account. The system is not capable of correctly assessing reality. For example, if a client has a room in a communal apartment on the Arbat, the system will give him a high score. After all, there is a Moscow residence permit and housing in the center. And a luxurious mansion with an area of several thousand square meters, located in a small village on the Black Sea coast, will be designated by the system as “village housing” and will lower the score for the lack of a Moscow residence permit.

What data is involved in building the model

In cases where an assessment of the creditworthiness of individuals is carried out, a bank employee must rely on a number of criteria. All of them can be divided into three large groups, each of which includes many indicators.

Personal:

• passport details;
• marital status;
• age;
• presence of children, their age and number.

Financial:

• basic monthly income amount;
• place of work, position;
• number of entries in the work book;
• employment period in the lastfirm;
• the presence of encumbrances (debts, outstanding loans, alimony and other payments);
• having your own home, car, bank accounts and deposits.

Additional:

• existence of additional undocumented sources of income;
• possibility of providing a guarantor;
• other information.

The scoring model for assessing the creditworthiness of a legal entity is built a little differently. Here, financial indicators are considered key parameters. But since they are calculated based on the financial statements of the applicant campaign, in which case they can be adjusted. Given this possibility, the objectivity of the assessment is greatly reduced. Therefore, scoring with dynamic indicators is used to evaluate legal entities.

The first step is based on the collection of information that cannot be calculated in material terms. These include business reputation, market position, expert opinion on financial and economic sustainability.

The next step is the definition of financial indicators. Here, liquidity ratios, equity ratios, objective indicators of financial stability, profitability, asset turnover, and so on are studied.

According to the results of two independent assessments, the bank makes a decision on issuing a loan.

Who can get high marks

If we talk about individuals, then the assessment of the borrower is also carried out according tomany indicators. There are many factors that can positively affect the rating:

• high salary;
• presence of own movable and immovable property;
• long term residence in a particular region;
• availability of deposits;
• documentary proof of income;
• presence of a landline phone at home and at work;
• confirmation of official employment, especially in state-owned enterprises and in the public sector;
• presence of open accounts (deposit, pension, settlement) in the creditor bank;
• having a significant down payment for a mortgage or car loan;
• opportunity to provide recommendations, guarantor or co-borrower;
• excellent credit history.

How to cheat the system and can it be done?

It is believed that since the assessment is carried out by a soulless machine, then it can be deceived by finding out in advance the “correct” answers to the questions. In fact, this is far from the case.

The client scoring model is built in such a way that all answers to questions can be checked using the relevant documents. In addition, banks often form entire networks and dump the results of their checks into one common system. So if fraud is revealed during the additional verification process, a fat cross will be put on your reputation as a borrower. Nowhere and never will you get a loan again.

You can try to embellish reality only ifwhen data is entered into the system only from the words of the client. However, finding such a bank is quite difficult, and the interest there is so extortionate that you yourself are unlikely to want to take out a loan there.

Scoring and credit history

If we take into account that at least half of the inhabitants of our country have already had the experience of applying for a loan, such an indicator of assessing a borrower as a credit history comes to the fore. Since the BKI has been supplemented for some time with data on borrowers of microfinance organizations and other similar institutions, scoring models have appeared on the market, adjusted for the presence and condition of the credit history.

These models evaluate borrowers by the probability of non-repayment of funds, the occurrence of delinquencies, the number of loans previously repaid and other parameters.

In addition, banks are offered an automatic customer information service. By activating this service, the bank will know:

• about opening accounts by a client in other financial institutions;
• about getting new loans;
• about the occurrence of any delays;
• new customer passport details;
• about changing limits on accounts, credit cards and so on.

This will further adjust the bank scoring system and get maximum information about potential borrowers.