Credit Risk Modeling Basel parlance - Obliger - I am obliged; Is the borrower Lender/Pawnbroker - one who lends money Credit

Risk - is the risk of lending money 2 options: the principled is not paid back or the interest in not paid back Basel Norms is a framework for measuring capitalization of banks(regulatory) and lending institutions. It's job is to ensure lending institutions are sufficiently capitalized. NBFs/Lending institutions cannot accept deposits The banks have an obligation that the money is protected and so are required to be solvent There are only 2 sources of capital - Shareholder capital and Reserves & Surpluses Basel ensures that a bank should hold a minimum of 8% of its risk weighted assets as capital and 50 % of that capital should be share holder capital. Risk Weighted Assets - Loans are assets as they generate income. For ex, if 1000 rs are my assets , i must have a capital of 8%, which is 80 rs, out of which at least 40 Rs should be from the shareholder. Deposits are liabilities - Because u need to pay out How does RBI gets this info - it knows the banks creditworthiness What is a Risk Weight - risk associated with assets in case of defaults - Its against my principle to pay the interest or Its against my interest to pay the principle

Assignment 1 - why CRR is 8%. What are all the ratios that are considered.

The method to measure the risk weight is - logistical regression. Exercise 1 : Credit Risk Score Card with real data Some facilities are Asset facilities and deposits are liabilities facilities Why did u rob the banks ...That's where the money is ... Bear your soul on the form for a loan...

Exercise 1 Data Facility Id - how many number of services the customer has taken from the bank Customer ID Dependents Annual income SB account balance Loan Type Loan Amount Loan tenure in months Margin - the amount you put in (% that we pay- the customers) Co applicant Existing Home Loan outstanding Branch Code Guarantor Collateral - prime securities - easily convertible into cash , Ex FDs mere collateral - gold, house EMI Default (90 days) or Bad Debt (NPA) Ps_Property Month - cutoff Date - usually 31st of March - the date u pull of the data Cut off DATE - first thing to look at Vintage - means as on the cut off date , going back in history ex: tenure Vintage can vary with customer, cutoff date and facilities In data mining , we take the calendar cutoff Granularity - To what level are you summarizing the data It could be a geography, a group , for a customer Currency = Cut off Date Vintage - customer, product or calendar time Granularity - Dimensions (product, time, geography, store, market) Granularity is a combination of fact(measured in numbers , sales, salary) and dimension(rice, wheat, surat, january) Granularity is user defined - it is essential for u as manager to decide its level All KPIs can be facts, but all facts need not be KPIs What data do you need in creating the data:

Case Study obj : Measure the risk weight of a home loan borrower Basel says Vintage is 5 yrs Cut off Data is 28 1 2009 KPIs should be measured monthly. What data should we extract: Pull out customers data for people who have defaulted in last 5 years A second list of people who have not defaulted in 5 years

what data will u ask from customer Income - numbers Credit card y/n lOAN Y/N FD Y/N S A/C Y/N Customer Income Y/N Loans from other banks - Y/N Auto Loan - y/n Owned House value - number Owned/Rented - Y/N if rented - value - number Gurantor - Y/N RD a/c - Y/N Collateral - value and name and prime or normal TENURE OF LOAN - NUMBER Margin - value reason for the loan EMI lOCATION of the property Value of the property Age of the borrower Age/Gender/Demography/Education Marital status No of dependents 1st or 2nd house

bank forms/insurance forms

Risk weight is the probability of default

Basel 2 defines PD as the probability of Default as 1 year. From the cutoff date what is the probability that the customer would default in 1 year PD is a number between 0 and 1 0 - absolutely no chance of default - prime credit 1- 100 % chance of default Rating 0 - AAA, 1- D Rating Grades - AAA,AA,A,BBB,BB,CCC,CC,C,D If an account has defaulted - D Assignment 1 - Loan Servicing Ratio - Figure out what the other ratings indicate - Moodies, S&P, Crisil - What is CRR, SLR ..mention that in paper