A credit scoring approach for the commercial banking sector

A credit scoring approach for the commercial banking sector

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Article ID: iaor20033195
Country: Netherlands
Volume: 37
Issue: 2
Start Page Number: 103
End Page Number: 123
Publication Date: Jun 2003
Journal: Socio-Economic Planning Sciences
Authors: , , ,
Keywords: statistics: data envelopment analysis
Abstract:

For managing credit risk, commercial banks use various scoring methodologies to evaluate the financial performance of client firms. This paper upgrades the quantitative analysis used in the financial performance modules of state-of-the-art credit scoring methodologies. This innovation should help lending officers in branch levels filter out the poor risk applicants. The Data Envelopment Analysis-based methodology was applied to current data for 82 industrial/manufacturing firms comprising the credit portfolio of one of Turkey's largest commercial banks. Using financial ratios, the DEA synthesizes a firm's overall performance into a single financial efficiency score – the ‘credibility score’. Results were validated by various supporting (regression and discriminant) analyses and, most importantly, by expert judgements based on data or on current knowledge of the firms.

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