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Tacenko Alena

Tacenko Alena

Theme of master's work: Development of model of estimation of risk at crediting of physical persons

Leader of work: Belovodskiy Valeriy,associate professor,c.m.s


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Abstract


Content


1 Introduction, ground of actuality
2 Purpose and tasks
3 the Scientific novelty
4 Review of the executed researches
5. Conclusion

1 Introduction, ground of actuality

   Credit is the basic type of bank activity, which provides on the average 50 % to the profitableness of all assets, and, as a rule, a high profitableness is directly accompanied an enhance able risk.
    A credit risk or risk of non-payment is one of basic types of risks.
   The unrepayment of credits, especially of large ones, can bring a bank over to bankruptcy, and by virtue of his position in an economy, to a number of bankruptcies, related to him enterprises, banks and private individuals. Therefore a management a credit risk is necessary part of strategy and tactic of survival and development of any bank. Crediting always was and remains the priority economic function of banks.
   There are different estimations methods of credit risk, which are used by banks, for example, scoring method, method of analogies, method of expert estimations. However, quickly growth of the banking system, including crediting, entails a necessity for the improvement of existent models of credit risk, consequently, this theme is actuality.

2 Purpose and tasks

   Purpose of work: to set dependences of risks forming at delivery of physical person’s credit for development of the estimation system of credit risks, allowing minimizing a credit risk in activity of commercial banks.
   Tasks, decided in master's degree work:
   - to execute the analysis of existent models of estimation of credit risk;
   - to carry out the capture of questionnaire data and conduct their comparative analysis;
   - to develop a model for the estimation of credit risk, based on a scoring model;
   - to develop the system of risk estimation at delivery of physical person’s credit as a software product, directed on the use in the process of crediting commercial banks.

3 the Scientific novelty

   The scientific novelty consists of:
   - development of software product, realizing the basic methods of credit scoring realization;
   - lead through of calculable experiments and drafting of comparative analysis methods of credit score realization;
   - development of model of credit risk estimation, based on credit scoring.

4 Review of the executed researches

   A credit risk or risk of non-payment is one of basic types of risks.
   There are two estimations of credit risk: at delivery of loan and at its redemption. The important stage at crediting is a risk at delivery of loan, in fact if it is wrong to estimate solvency of client a bank can bear considerable losses.
   In a table 1 there are the results of comparative analysis of existent methods of risk estimation at delivery of physical person’s credit.
Table 1 – the Comparative analysis of methods of credit risk estimation

Method
Information base
Result
Scoring - questionnaire information
- information on a borrower from a credit bureau
- motions on accounts
Marks are appropriating to every category of borrowers
Normative method - estimations of the credit rating by external ratings agencies Risk weight is appropriating to every category of borrowers
Method of expert estimations - questionnaire information
- a presence of 5-7 economic activity experts 		Delivery/refuse about delivery of loan
Method of decisions tree - questionnaire information Distributing of borrowers on risk categories
Method of analogies - questionnaire information
- existent database (experience of past years) 		A borrower falls into a risk category, as well as borrower with alike information

   For the construction of the system of risk estimation at delivery of physical person’s credit will be used credit scoring, based on questionnaire information of physical person.
   Credit scoring – is one of the most reliable and logically successive methods of risk degree determination, related to potential, or by an existent borrower. Certainly, credit scoring is applicable not always and not everywhere. There are other methods of risks estimation (method of analogies, method of expert estimations). Nevertheless, for the last ten years credit scoring is used more frequently. Traditional models of scoring divide clients into different categories, according to the on the degree of the risk probability, depending on the amount of the collected marks. Reverse scale of the got marks and proper probability of the risk are a standard in many financial institutes and organizations all over the world.
   Information which will be inquired at a physical person:
   - credit purpose;
   - credit sum;
   - interest rate;
   - age;
   - domestic position;
   - continuous experience of work;
   - monthly balance of family payments, hrn (index for the last 3 months);
   - information about the monthly charges of family, hrn (index for the last 3 months: communal payments, telephone, television, education (school, kindergarten), alimonies);
   - market value of mortgage;
   - repayment of credits in the past.
    There is a lot of methods of credit scoring in the world practice. The known method is a model of D. Dyuran, appearing in the USA in 40th. Dyuran selected the groups of factors, allowing to define the degree of credit risk. He selected the followings coefficients at the extra charge of marks:
   - 0,01 score is for every year over 20 years (maximum - 0,30);
   - 0,4 score is for woman, 0 score is for man;
   - 0,042 score is for every year in this locality (maximum – 0,42);
   - 0,55 score is for a profession with a low risk, 0 score is for a profession with a high risk, 0,16 score is for other professions;
   - 0,21 score is for work with enterprises in public industry, 0 score is for other;
   - 0,059 score is for every year of work on this enterprise;
   - -0,45 score is for presence of bank account, 0,35 score is for presence of the real estate, 0,19 score is for presence of policy on insurance.
   Thus, Dyuran defined the border of loan delivery as 1,25 and more. If the collected marks sum is less than 1,25, consequently, a borrower is insolvent, and if it as more, solvent.
   In Ukraine the estimation of the financial state of borrower is carried out by the following indexes:
   1.Coefficient of material well-being, which characterizes material well-being of return of credit and interest rate, given a borrower.
   2. Borrowers solvency coefficient.
   3. Age of borrowers.
   4. Presence of propert.
   5. Presence of permanent work.
   6. Continuous experience of work.
   7. Repayment of credits in the past.
    As a result of calculation of all of the above enumerated indexes, marks which in the total are added up turn out, and on a rating scale the category of borrower is determined (see table 2).

Table 2 – Rating scale for borrower class determination
Value of index
Financial state
Class
From 50 marks and higher Very good À
From 40 to 50 marks Good Á
From 25 to 39 marks Satisfactory Â
From 15 to 24 marks Bad Ã
From 14 and less Very bad Ä

   If a borrower gets in the first or second class, a bank will give out him a loan, if in other classes – a risk for a bank is too high and will cancel in a loan.
   Coming from the existent models of estimation of credit risk it is possible to draw a conclusion about credit scoring: this model can be adapted for the local features of physical persons of different countries.

5 Conclusion

   Thus, there were analyzed the existent methods of estimation of credit risk and it is found out that credit scoring is the most perspective method of estimation of credit risk which is «flexible» enough for adaptation of certain region of country.
   Consequently, system of estimation of risk at delivery of credit will be based on this method.
   The development system can be used in credit activity of commercial bank.
   Final readiness of work is January, 2008.

Literature

   1. http://masters.donntu.ru/2006/kita/shepeleva/library/index1.html
   2. http://www.cicr.cz/?PageID=2307
   3. http://mixzona.ru/referat/referat/38622
   4. http://www.it2b.ru/articles/razdel2/art2_4_22.php
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