 Measuring Risk on Consumer Instalment CreditPaul F. Smith
Management Science, 1964, vol. 11, issue 2, 327-340 Abstract: The advantages of statistical measures for grading credit risks in lending to consumers have been widely recognized but relatively little use has been made of such systems. The paper develops a relatively simple statistical method for measuring risk on individual accounts that can also be used for measuring and controlling portfolio quality and for estimating loss rates. The procedure entails four steps: -- Comparison of good and bad accounts in the search for characteristics that are associated with bad accounts; -- Calculation of bad account probabilities for discriminating characteristics; -- Development of a risk index from bad account probabilities to be used in grading accounts; -- Evaluation of the risk index. -- A test of the Method the accounts of a commercial bank is described and the judgements implied by the risk index are compared to the criteria used by interviewers in rejecting applicants. A great many similarities are found between the results of the two methods but a number of striking dissimilarities are observed. The last section of the paper illustrates the ways in which the risk index can be used to adjust credit quality to the desired volume and loss experience. It also demonstrates its use in measuring portfolio quality and in estimating loss rates. Date: 1964 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:11:y:1964:i:2:p:327-340 Access Statistics for this article More articles in Management Science from INFORMS Contact information at EDIRC. |
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