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Credit Scoring or Risk Rating

Credit Scoring or Risk Rating. Developed to assist lending institutions in credit management and risk assessment. A borrower’s risk lies in their overall repayment ability as it pertains to the probability of default or late payments. Advantages. Improved accuracy of loan classification

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Credit Scoring or Risk Rating

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  1. Credit Scoring or Risk Rating • Developed to assist lending institutions in credit management and risk assessment. • A borrower’s risk lies in their overall repayment ability as it pertains to the probability of default or late payments.

  2. Advantages • Improved accuracy of loan classification • More timely decisions can be made. • Bases for responding to competitive pressures via a risk rating system that is linked to a loan pricing system. • Opportunity to examine risk on terms consistent with the lenders profitability and growth goals. • Provides information to meet the needs of examines and regulators

  3. Components in Developing a Credit Scoring System • Personnel expertise • Time and resources available • Ability to automate • Amount and quality of information needed • Risk classification criteria • Weighting and scoring measures • Validation and documentation

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