Centre for Operations Excellence
Extending Credit Risk Analysis to the High-Risk Loan Market for a Credit Union
Client Profile
The client is Canada's largest credit union, with over 40 branches throughout Greater Vancouver, the Fraser Valley, and Victoria. Founded in 1946 to provide financial services to people from all walks of life, the client has grown to become a major financial institution serving the people in Canada. The notion of providing ethical and innovative services is paramount to the client’s approach to conducting business.
Business Challenge
The client mainly serves members who present the credit union with little exposure to credit risk. Extending the loan portfolio to include higher risk loans has been difficult in the past, resulting in losses from bad debt write-offs. Currently, the client uses Fair Isaac Beacon scores delivered by Equifax Credit Bureau, together with other information, to make decisions on credit granting. While this has worked well for “prime” customers with high Beacon Scores, the client’s experience with members whose Beacon Score is low and thus present higher risk has been mixed. The client approached the Centre for Operations Excellence (COE) to conduct a study to develop and assess credit profitable loans, and to grant credit at an interest rate that would appropriately reflect the risk involved in the loan. This could assist the client to enter the high-risk market and generate profits based on risk-based pricing. granting methods for use in the high-risk loan market. The objective of the project was to consistently identify
Value Delivered
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The COE team contributed the following to client:
Developed credit granting process flows with alternative scenarios for credit risk pricing Assessed historical performance of the current credit scoring system Based on the data obtained, performed high-level data analysis and identified predictive characteristics of members, which were related to an applicant’s payback capacity. Recommendations on credit granting strategies and data collection
The COE Approach
The COE interviewed key personnel in both loancenter and branch levels and observed the processes to establish a detailed process map. The COE obtained financial data from Equifax. The preliminary models were developed by using logistic regression analysis, classification tree and decision tree type analysis. analyses, Through the COE extensive team process identified and data predictive
characteristics of members, which were related to an applicant’s payback capacity. The recommendations be important for the client and its future research. on credit granting strategies and data collections will
Centre for Operations Excellence Tel: 604-822-1800
209-2053 Main Mall, Vancouver, BC V6T 1Z2 www.coe.ubc.ca
Email: info@coe.ubc.ca