A Mathematical Programming Approach with Revenue Management in Home Loan Pricing (Revised as on 20-12-2021)

Goutam Dutta, Sumeetha R. Natesan, Deepika Thakur and Manoj K. Tiwari

IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: This paper enumerates the benefits of revenue management to the banks and the points to be considered while creating a revenue management and dynamic pricing model. Further it explains the differences in the application of these concepts to the financial sector as opposed to other sectors. We then delve into the method of giving home loans after identifying the major parameters that play a role in it. We formulate a dynamic pricing model for home loans for a bank. The model optimizes the net present value of money available subject to pricing limits, cash flows. It also considers the default probability as a function of interest rate. We then assume different versions of demand function. We consider when demand function is given by a straight line, an exponential function and by rectangular hyperbola. In all the three cases we have demonstrated that the dynamic pricing of home loans does yield better results than the currently used static pricing.

Date: 2020-02-25
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Persistent link: https://EconPapers.repec.org/RePEc:iim:iimawp:14620

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