Credit Scoring for ITCD Bank - Assignment Example

BUSINESS ANALYTICS (CREDIT SCORING FOR ITCD BANK) By……………… Name University Name City, State Date of Submission 1. Banks consider many factors before advancing loans to customers. Banks will make sure that before they advance loans they have relevant information concerning the clients. There are periods when banks will offer more loans than other times. Different times will depend on the customers cycles and need of the loans they may want form the banks. Depending upon the value of the collateral, customers are able to get different loan value. The credit worthiness of customers also affects the amount and values of loans that are to be advanced to the customers. Customer perspective; customers satisfaction levels are evaluated to determine the levels of improvement. Internal perspective; the efficiency of work flow, value chain, employee satisfaction and productivity is evaluated to check the improvement from the previous assessments. At times, banks will offer loans that are not well secured. Customers may deceive on the surety they place for their loans by overvaluing their guarantee values. Credit specialists will be influenced by various factors when they make credit decisions. The decision will depend on bank account operations of the customer. In this scenario, credit officers think that married couples may not refute loans, and thus they advance loans faster than for unmarried individuals It is important for a firm to keep a reliable record highlighting the response of their customers. Credit officers would have to go a gone a notch higher in establishing Customer Response Centres. Information derived from these centres enables the marketers to plan and execute sales and output levels. Telephone would be a very convenient technique of examining the response from the customers. This is ideal for customers who may not be accessible. The person using this technique should make sure that the call is brief and to the point. This would avoid turning off customers who have a tendency of becoming easily bored (Schluter, 2005). 2 There are some elements in the data that exhibits a high degree of colinearity. For example the column of the age and the numbers of years that a person has worked tends to be much correlated. In from the data sheet, the parameters seem to be directly proportional to another. The reason why I chose the columns of age versus that of the number of years a person has worked is the fact that these parameters tend to be independent of one another. The observation is logical on its entirety because in most instances, people who are older tend to have worked for a longer period (Randel, 2009). Internally generated credits that are intangible have not been catered for adequately in the financial standards as evidenced by the actions of the financial analysts. Apparently, the financial analysts are forced to restate financial reports so that they can use them internally. The actions of corporate managers with respect to intangible assets reports also want (Alfredson, 2007). They opt to rely on internal financial reports concerning intangible assets rather than rely on the reports formulated under the standards of international financial reporting. The main reason behind this approach is that corporate managers do not trust the treatment of internally generated intangible assets as manifested by the financial reporting standards. Such goes a long way in proving that the standards are inadequate to say the least. Question 3 According to the regression model developed as a result of data from age and number of years worked column, the credit analysts are of the opinion that these two pieces of information are very important. This is with respect to determining the credit worthiness of a customer. From the regression model, the credit specialists are of the opinion that people who have stayed in the employment for a longer period tend to be more credit worthy compared to those who have not stayed in the employment for long. Research and development comprise an integral component of the credit that are internally generated by a company. Despite this element playing a vital role in the operations of a company, the financial reporting standards of 2005 have not comprehensively covered it. The observation confirms the hypothesis that the conventional treatment of intangible assets like research and development tends to be inconsistent as far as the standards of financial reporting are concerned. If allowed to continue for a considerable period, it might put the credibility and authenticity of financial reports into doubt. A major flaw witnessed in the 2005 reporting standards of financial reports has to do with the book to market ratios. Apparently, the credit specialists feel that the credit worthiness of an individual can to a certain extent be pegged on the age of a person. Prior experience shows that customers who are younger are more likely to default on their loans compared to those whose age is advanced. They attribute this to the order of priorities which a majority of younger people have not adequately mastered compared to the older one. Hence from the model, the specialists tend to prefer older people compared to those who are young as far advancing credit is concerned. QUESTION 4 The following is a regression model that has been built from a sample of AGE (X) 25 27 32 36 37 42 No. Employment Yrs.(Y) 2 5 7 10 12 15 Solution X Y X2 XY 25 2 625 50 27 5 729 135 32 7 1024 224 36 10 1296 360 37 12 1369 444 42 15 1764 630 SUM OF X=199 SIM OF Y=51 SUM OF X2=6807 SUM OF XY=1843 Regression Formula: Regression Equation(y) = a + b x Slope (b) = (NΣXY - (ΣX)(ΣY)) / (NΣX2 - (ΣX)2) Intercept (a) = (ΣY – b (ΣX)) / N b= (6*1843)-(199) (51)/(6*6807-(199*199) = (11058-10149)(40842-39601) Get square root b=1298 a=51-1298(199)/6 =-43041.8 Y=-43042+1298x 5 The final model is more successful than the previous models. More emphasis has been put in place before advancing loans to customers. Different levels of income have been a major factor in determining the amount of loans that customers will get. The value of loans to be given out will be proportion to the amounts of net income that the customer receives. In the final model, the percentage of customers that are marked good and eligible for loans is higher than in the previous periods. When giving out loans banks consider the motive and reason for taking loans from the customers. Customers must make sure that they perform the intended business after taking the loans. Credit banks are able to monitor the loan servicing by their customers. The banks make sure that the loans they give out are used for the intended purposes. The model will be used analyze customer and give feedback to the various clients. The personnel will make sure to maintain a good reputation for the Bank by applying high levels of professionalism. 6 Credit officers see good signs of credit from married couples. They lay more emphasis on married families. Credit facilitators think that married people have more financial commitments thus they will need to take up loans. Married couples will want more cash to undertake their day to day lives, and thus there is likelihood that they will want to take loans to finance their needs. Married couples pay school fees for their kids. Credit officers will see this as potentials for loan advancements. However, eventualities like divorce may affect loans adversely. In case of a divorce married couples might not be able to finance their loans further; its advisable that before couples divorce they must approach their bank to make account changes in case of joint account holding (Ganguin & Bilardello, 2005). Banks will need to formulate strategies that will assist in running, maintaining and making the business operations effective and efficient. Strategic positioning involves laying out objectives and goals that help approach a situation or solution. Business managers carefully develop strategies and take considerable steps to communicate to the other staff so that the business operations can operate smoothly towards realizing the organizations set objectives. If one spouse who is responsible for the divorce in unwilling or unable to pay, the bank can change the contract terms so that the credit reports may appear on both spouse. However in this case the credit scores of both couples will be affected negatively and they might diminish they future credit worthiness. In some cases harsh and angry couple whether he or she may make large loan purchases on joint accounts with intentions of hurting and punishing the other partner with huge credit loans and ruining the credit history and future credit score for the other partner (Sathye, 2008). 8 A credit score in the report can be defined as a number that is utilized to measure the level of risk of the borrower. In this report, I have employed techniques that are commonly used by lending facilities like credit card companies, mortgage bankers and auto dealership. I have also tried to borrow some of the credit rating techniques used by landlords, insurance companies and employers. The report has explored the following major factors that tend to affect the credit rating of a potential borrower: Payment History 35%-This element of credit score tries to explore the trustworthy of a borrower by looking at his record to determine his payment of debts. The element emphasizes on whether the borrower has met his payment obligations on time. Late payment of the bills tends to affect the credit score negatively. The emphasis is also laid on debt settlements, charge offs and bankruptcies. Amount Owed 30%-This element of the report explores the amount of money that the potential borrower owes. The less money owed the better as far as credit rating is concerned. It also explores on the amount that the borrower owe on each specific account. Also, it explores on the actual amount that the borrower has. Length of credit history 15%-Credit officers will consider the time customers have been using their credit services. The analysis will help to determine the credit score of different customers. According to my report, credit facilitators will convene credit meeting to scrutinize various credit applications to determine credit scores for different customers. Customers with oldest and most active accounts will qualify for credit faster than others who have lesser active accounts. Accounts that are marred with late payment and negative items will lower down their credit worthiness. However, short term history accounts will also qualify for loans provided the accounts have made payments on time and did not owe the banks a lot. New Credit 10%-Credit score will consider the number of accounts opened and the time of their opening. The score indicates that if many accounts have opened in the recent past, there is the likelihood of credit risks. According to the report, people will tend to open many different accounts when they are experiencing cash flow problems. Moreover, the same people might be planning to take many debts. Many accounts will lower credit worthiness confidence. Types of Credit in Use 10%-Credit score will be determined by different types of credit held by customers. For example, store accounts, credit cards, mortgages and installments loans. Customers with many credit accounts offered by banks will increase the creditworthiness. Many credit accounts raise customers loyalty to the bank thus increasing the credit worthiness. References Ganguin, B., & Bilardello, J. (2005). Fundamentals of corporate credit analysis. New York: McGraw-Hill. Randel, J. (2009). The skinny on credit cards how to master the credit card game. Westport, CT: Rand Pub. Sathye, M. (2008). Credit analysis and lending management. Milton, Qld.: John Wiley & Sons Australia. Schluter, W. (2005). Credit analysis,. New York: Prentice-Hall. Read More