A Credit Scoring Model for Commercial Loans
TL;DR: In this paper, a credit scoring model for commercial loans is presented, which is limited to the evaluation of existing loans and could be used by bank loan offiicers for loan review and by bank regulatory agencies for loan examination.
Abstract: An increasing number of credit scoring models have been developed in recent years as a scientific aid to the traditionally heuristic process of credit evaluation. With few exceptions these models are designedfor screening consumer loan applications. The purpose of this paper is to present a credit scoring model for commercial loans. The model is limited to the evaluation of existing loans and could be used by bank loan offiicers for loan review and by bank regulatory agencies for loan examination.
Citations
More filters
TL;DR: In this paper, the economics of small business finance in private equity and debt markets are examined. But the authors focus on the macroeconomic environment and do not consider the impact of the macro economic environment on small business.
Abstract: This article examines the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small business finance, and how capital structure varies with firm size and age. The interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment. We also analyze a number of research and policy issues, review the literature, and suggest topics for future research.
2,778 citations
TL;DR: In this paper, the authors examined the role of relationship lending in small firm finance and found that borrowers with longer banking relationships pay lower interest rates and are less likely to pledge collateral.
Abstract: This article examines the role of relationship lending in small firm finance. It examines price and nonprice terms of bank lines of credit extended to small firms. The focus on bank lines of credit allows the examination of a type of loan contract in which the bank-borrower relationship is likely to be an important mechanism for solving the asymmetric information problems associated with financing small enterprises. The authors find that borrowers with longer banking relationships pay lower interest rates and are less likely to pledge collateral. These results are consistent with theoretical arguments that relationship lending generates valuable information about borrower quality. Copyright 1995 by University of Chicago Press.
2,528 citations
Posted Content•
TL;DR: This article found that when borrowers have private information about risk, the lowest-risk borrowers tend to pledge collateral, whereas when risk is observable, the highest risk borrowers tend not to pledge.
Abstract: Most commercial loans are made on a secured basis, yet little is known about the relationship between collateral and credit risk. Several theoretical studies find that when borrowers have private information about risk, the lowest-risk borrowers tend to pledge collateral. In contrast, conventional wisdom holds that when risk is observable, the highest-risk borrowers tend to pledge collateral. An additional issue is whether secured loans (as opposed to secured borrowers) tend to be safer or riskier than unsecured loans. Empirical evidence presented here strongly suggests that collateral is most often associated with riskier borrowers, riskier loans and riskier banks.
962 citations
Cites background from "A Credit Scoring Model for Commerci..."
...However, several papers have considered issues related to ‘inside collateral’, including Smith and Warner (1979b), Stulz and Johnson (1985), and Swary and Udell (1988). ‘Inside collateral’ refers to assets owned by the borrowing firm that are pledged to a particular lender....
[...]
...However, several papers have considered issues related to ‘inside collateral’, including Smith and Warner (1979b), Stulz and Johnson (1985), and Swary and Udell (1988). ‘Inside collateral’ refers to assets owned by the borrowing firm that are pledged to a particular lender. Smith and Warner (1979b) argue that inside collateral may be useful in solving asset-substitution problems initially raised by Jensen and Meckling (1976)....
[...]
...The only previous empirical studies of collateral and risk of which we are aware are Orgler (1970) and Hester (1979)....
[...]
...However, several papers have considered issues related to ‘inside collateral’, including Smith and Warner (1979b), Stulz and Johnson (1985), and Swary and Udell (1988)....
[...]
...The only previous empirical studies of collateral and risk of which we are aware are Orgler (1970) and Hester (1979). Orgler compiled a data base on individual loans from bank examination files and distinguished ‘good’ from ‘bad’ loans on the basis of whether the loans were ultimately ‘criticized by the bank examiners....
[...]
TL;DR: This article found that when borrowers have private information about risk, the lowest-risk borrowers tend to pledge collateral, whereas when risk is observable, the highest risk borrowers tend not to pledge.
878 citations
Journal Article•
TL;DR: A wide range of statistical methods have been applied, though the literature available to the public is limited for reasons of commercial confidentiality as discussed by the authors, and particular problems arising in the credit scoring context are examined.
Abstract: Credit scoring is the term used to describe formal statistical methods used for classifying applicants for credit into "good" and "bad" risk classes. Such methods have become increasingly important with the dramatic growth in consumer credit in recent years. A wide range of statistical methods has been applied, though the literature available to the public is limited for reasons of commercial confidentiality. Particular problems arising in the credit scoring context are examined and the statistical methods which have been applied are reviewed.
791 citations
References
More filters
TL;DR: In this paper, a set of financial and economic ratios are investigated in a bankruptcy prediction context wherein a multiple discriminant statistical methodology is employed, and the data used in the study are limited to manufacturing corporations, where an initial sample of sixty-six firms is utilized to establish a function which best discriminates between companies in two mutually exclusive groups: bankrupt and nonbankrupt firms.
Abstract: ACADEMICIANS SEEM to be moving toward the elimination of ratio analysis as an analytical technique in assessing the performance of the business enterprise. Theorists downgrade arbitrary rules of thumb, such as company ratio comparisons, widely used by practitioners. Since attacks on the relevance of ratio analysis emanate from many esteemed members of the scholarly world, does this mean that ratio analysis is limited to the world of \"nuts and bolts\"? Or, has the significance of such an approach been unattractively garbed and therefore unfairly handicapped? Can we bridge the gap, rather than sever the link, between traditional ratio \"analysis\" and the more rigorous statistical techniques which have become popular among academicians in recent years? The purpose of this paper is to attempt an assessment of this issue-the quality of ratio analysis as an analytical technique. The prediction of corporate bankruptcy is used as an illustrative case.' Specifically, a set of financial and economic ratios will be investigated in a bankruptcy prediction context wherein a multiple discriminant statistical methodology is employed. The data used in the study are limited to manufacturing corporations. A brief review of the development of traditional ratio analysis as a technique for investigating corporate performance is presented in section I. In section II the shortcomings of this approach are discussed and multiple discriminant analysis is introduced with the emphasis centering on its compatibility with ratio analysis in a bankruptcy prediction context. The discriminant model is developed in section III, where an initial sample of sixty-six firms is utilized to establish a function which best discriminates between companies in two mutually exclusive groups: bankrupt and non-bankrupt firms. Section IV reviews empirical results obtained from the initial sample and several secondary samples, the latter being selected to examine the reliability of the discriminant
10,737 citations
TL;DR: In this paper, several discriminant and multiple regression analyses were performed on retail credit application data to develop a numerical scoring system for predicting credit risk in a finance company, and the results showed that equal weights for all significantly predictive items were as effective as weights from the more sophisticated techniques of discriminant analysis and stepwise multiple regression.
Abstract: Several discriminant and multiple regression analyses were performed on retail credit application data to develop a numerical scoring system for predicting credit risk in a finance company. Results showed that equal weights for all significantly predictive items were as effective as weights from the more sophisticated techniques of discriminant analysis and “stepwise multiple regression.” However, a variation of the basic discriminant analysis produced a better separation of groups at the lower score levels, where more potential losses could be eliminated with a minimum cost of potentially good accounts.
222 citations
Additional excerpts
..., [8]) ....
[...]
TL;DR: In this article, the use of a linear function for discriminating with dichotomous variables is discussed and evaluated, and four such functions are considered: Fisher's linear discriminant function, two functions based upon a logistic model, and a function based upon the assumption of mutual independence of the variables.
Abstract: The use of a linear function for discriminating with dichotomous variables is discussed and evaluated. Four such functions are considered: Fisher's linear discriminant function, two functions based upon a logistic model, and a function based upon the assumption of mutual independence of the variables. The evaluation of these functions as well as of a completely general multinomial procedure is carried out within the context of a 1st order interaction model by means of computer experiments. The product moment correlation of the optimal function with the linear function under evaluation plays a central role as a criterion for judging the relative merits of the procedures considered.
195 citations
"A Credit Scoring Model for Commerci..." refers methods in this paper
...1 While the explanatory variables are assumed to belong to multivariate normal populations it has been shown that functions with dichotomous variables can be used efficiently for discriminant analysis [6]....
[...]
29 citations
"A Credit Scoring Model for Commerci..." refers background in this paper
...Moreover, a study by Wu confirmed that examiner criticisms on business loans are a good ex ante measure of loan quality [9]....
[...]
15 citations