Question

Explain the purpose/benefits in adding a credit-scoring model to evaluate a loan application. Briefly describe how this process may take place in 1) consumer and 2) Corporate lending decisions. (Note: there are several correct answers to the second part of this question. To receive full credit you only need to describe one example of each.)

Answer 1

The purpose of adding a credit scoring model to a lending decision is to add a layer of security and diligence to the entire loan underwriting process. Also credit scoring model nowadays can use data analytics to make sophisticated analysis and reduce the error in decision making for credit extension or denial.
1) For a consumer lending process, the credit scoring model can take on several inputs such as spending behavior, education, job type and monthly/annual income to generate a credit score card and the probability of default on a loan. Using this, one can then decide to extend the loan or reject the application.
2) For a corporate customer, the credit scoring model can take inputs such as leverage in the balance sheet, revenue, net income and their growth as well as promoter financial position to output a probability of default and a possible loss. Then taking other factors into consideration and the strategic nature of the loan being provided, the decision can be finally taken by the underwriters.