A credit score alone may not sufficient to predict default risk

During the recent economic meltdown, many banking and securities institutes realized that just a credit score alone may not sufficient to predict default risk. The multifaceted economic environments require additional KPI (Key Performance Indicator) to correctly forecast default. Banks should develop investigative model and process flow to evaluate the default tendency of each loan and to find a concrete strategy to know if a loan falls into arrears. By identifying the KPI, they can appropriately mitigate risk and resources.  

My recommendations model includes the following KPI, but that also depends on what’s your business model is:

1.     Credit score: Clearly we can’t ignore credit scoring; this is one of the important parameter in predicting default risk.

2.     Single Name Common Risk: SNCR is vital factor, which help banks to find a risk mitigation measurement. In SNCR banks can list out single customer with many loans along with default loan.  

3.     Borrower demographic: off course this can be bit controversial, however I think this really help in correctly forecast default.

4.     Products: do you ever analysis the history of your products. Some products are so favorable to default tendency.

5.     Evaluate customer standing: based on your business rules it consists of reviewing the customer figures, like total commitment, collaterals… etc. Mostly banks do this process after loan become default but I recommend it should be done periodically.  

Banks can add and change more KPI as per their business. SAP Banking covers all these KPI and others.