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(From The Nation (Pakistan))
Byline: M. Zaki Basir
Consumer credit risk management practices vary considerably among banks and between segments of the consumer lending industry. Those practices range between: * Credit decision-making * Credit-scoring * Risk based pricing * Loss forecasting * Portfolio management * Judgment Systems Many banks are investing in analytics to improve the credit decision-making process. Building on experience with credit-scoring technologies, these banks are employing expert systems that can adapt to changes in the economy or within specific customer segments.
Although quantitative scoring of credit applications was introduced as far back as the 1950s, advances in communications and information technology made it possible to fully automate consumer loan underwriting for the first time in the 1990s. This technology is now widely used in making not only credit card loans, but also mortgage, home equity, auto, and other consumer loans. A credit score is designed to predict the likelihood that a borrower will repay a loan, based on historical outcomes of loans to borrowers with similar characteristics. While no model claims perfect predictive power, today's models demonstrate a high degree of correlation between predicted and actual loan performance. Strong modeling capabilities clearly improve the quality and flow of information between borrower and lender, and even to third parties, and therefore enhance market efficiency. Another benefit of credit scoring is quicker loan approval decisions. Quicker approvals reduce cost and increase productivity, as loan officers need only manually review cases that are less than clear-cut. Thus, widespread credit scoring has lowered the barriers to entry, enhanced competition among banks and encouraged increased lending.
For many banks in Europe and America use of credit-scoring varies from those that are using …