Application of Business Intelligence and Analytics in Retail Banking

Introduction
Banking is a data heavy industry. However, effective data analytics techniques and mining of insights have remained
elusive. Given the tremendous advances in data analytics, the banking industry is ripe for change. As the industry works
its way through the rapidly changing technological environment, retail banks, in particular, must seriously consider using
analytics to improve decision-making, uncover unseen innovation opportunities and improve compliance within a more
stringent regulatory environment that is emerging.

It is becoming hard for the bankers to understand each customer, maintain a personal relationship and understand the
customer risk profile. Credit risks accounting for the risk of loss and loan defaults are the major source of risk today
encountered by banking industry and hence identifying and mitigating this risk is essential for the banks success.

Objective
Indias banking industry is undergoing through a phase of major transformation, with entry of more players in an already
competitive environment risk management faces new demands and challenges. In response to the spate of recent
financial crises, regulators are insisting on ever more detailed data and increasingly sophisticated reporting.

The objective of this project is to do credit risk modelling. Through this model we would analyze the various variables
which affect the credit risk of a retail bank and then find out the most significant variables out of the available pool.
Based on these variables we would recommend certain risk mitigation strategies.

Methodology
According to Basel II, banks can choose between two approaches to measure their credit risk: the standardized approach
and the internal ratings-based approach.

In phase one of the project, the focus of the study would be to understand the various forms and dimensions of credit
risk faced by a retail bank.

In phase two of the project we would find out the various variables that are associated with credit risk. We will use
dummy data for the modelling purpose. We would also try to define a credit risk model in R/Python which well further
help us find out the most significant variables which affect the credit risk faced by the bank. Moreover, we would also
try to estimate the value at risk, probability of default, loss given default and exposure at default for credit risks.

Once the significant variables have been separated from the pool of available variables affecting credit risk and a credit
risk model is in place, we will try to find out techniques which can help the banks mitigate risk arising from each variable
separately.

Scope
Under the Basel II guidelines, banks are allowed to use internal ratings-based (IRB) approach to capital requirements
for credit risk. Thus, the model developed in this project might not be applicable to banks eligible to adopt IRB.
Moreover, the project is restricted to credit risk modelling and would not consider the various other risks faced by a
retail bank.