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Credit Risk Modeling: A Comprehensive Guide

Credit Risk Modeling: A Comprehensive Guide

Credit Risk Modeling is the analysis of the credit risk of a borrower. It helps in understanding the risk, which a lender may face when he offers a credit.

What is Credit Risk?

Credit risk is the risk involved in any kind of loan. In other words, it is the risk that a lender runs when he lends a sum to somebody. It is thus, the risk of not getting back the principal sum or the interests of it on time.
Suppose, a person is lending a sum to his friend, then the credit risk models will help him to assess the probability of timely payments and estimate the total loss in case of defaulters.

Credit Risk Modelling and its Importance

In the fast-paced world of now, a loss cannot be afforded at any cost. Here’s where the Credit Risk Modeling steps in. It primarily benefits the lenders by accurate approximation of the credit risk of a borrower and thereby, cutting the losses short.

Credit Risk Modelling is extensively used by financial institutions around the world to estimate the credit risk of potential borrowers. It helps them in calculating the interest rates of the loans and also deciding on whether they would grant a particular loan or not.

The Changing Models for the Analysis of Credit Risks

With the rapid progress of technology, the traditional models of credit risks are giving way to newer models using R and Python. Moreover, credit risk modeling using the state-of-the-art tools of analytics and Big Data are gaining huge popularity.

Along with the changing technology, the advancing economies and the successive emergence of a range of credit risks have also transformed the credit risk models of the past.

What Affects Credit Risk Modeling?

A lender runs a varying range of risks from disruption of cash flows to a hike in the collection costs, from the loss of interest/interests to losing the whole sum altogether. Thus, Credit Risk Modelling is paramount in importance at this age we are living. Therefore, the process of assessing credit risk should be as exact as feasible.

However, in this process, there are 3 main factors that regulate the risk of the credit of the borrowers. Here they are:

  1. The Probability of Default (PD) – This refers to the possibility of a borrower defaulting a loan and is thus, a significant factor to be considered when modeling credit risks. For the individuals, the PD score is modeled on the debt-income ratio and existing credit score. This score helps in figuring out the interest rates and the amount of down payment.
  2. Loss Given Default (LGD) – The Loss Given Default or LGD is the estimation of the total loss that the lender would incur in case the debt remains unpaid. This is also a critical parameter that you should weigh before lending a sum. For instance, if two different borrowers are borrowing two different sums, the credit risk profiles of the borrower with a large sum would vary greatly to the other, who is borrowing a much smaller sum of money, even though their credit score and debt-income ratio match exactly with each other.
  3. Exposure at Default (EAD) – EAD helps in calculating the total exposure that a lender is subjected to at any given point in time. This is also a significant factor exposing the risk appetite of the lender, which considerably affects the credit risk.

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Though credit risk assessment seems like a tough job to assume the repayment of a particular loan and its defaulters, it is a peerless method which will give you an idea of the losses that you might incur in case of delayed payments or defaulters.



How to Effectively Pursue your Dream Career in Market Analysis? A Go To Guide!

How to Effectively Pursue your Dream Career in Market Analysis? A Go To Guide!

Being a Market Analyst in these days is synonymous to sealing the deal, where you don’t have to worry about your salary and many other perks which varies from company to company. But, it’s not an easy-peasy way to success in here.

A Market Analyst is heaped with a huge amount of responsibilities day in and day out, involving a colossal amount of data and analysing them to perfection. With the help of these data, they have to come up with innovative ideas to boost the business of the company.


Some of the other responsibilities include:

  • Exploring and analysing the tactics of the competitors, market conditions and the consumer demographics flawlessly.
  • Studying the customer opinions, buying habits, customers’ wants and needs.
  • Converting the collection of data into interactive presentations, tables and texts to bring them to the effective use for the benefit of the company.
  • Coming up with improved approach to collect data, comprising of surveys, interviews, questionnaires and more.

These are a few of the highlights of the jobs assigned to a Market Analyst. You can catch some more of them at A Market Analyst and His Job: An Overview!

Want to Become a Market Analyst? Here’s What You Should Go For!

Now, if you are a newbie and interested to pursue a career in Market Analysis, you shall always opt for the best customer marketing analysis training in the country, besides having:

  1. A Degree in Statistics, Computer Science, Economics or Business Administration – When it comes to Market Analysis, all they want is to interview the candidates with a Bachelor’s Degree in maths, statistics, computer science, business administration or economics. Some of the companies also shortlist the candidates from the field of communications. Furthermore, specialist degrees in marketing research and consumer psychology prove exceptional.
  2. Manoeuvre your Technical and Business Skills towards Analytic ThinkingAnalytic thinking is the thing that would take you for miles on end, regardless of your skill set. Besides, the skills which you should be needing are:

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Technical Skills:

  • Proficient with Statistical Analysis software, like, R, SAS and SPSS.
  • Well-versed in SQL databases and database querying languages.
  • Good programming skills.
  • Known to business intelligence and reporting software.
  • Customer Market Analysis courses.

At the end, we will provide you some business skills that you can develop to pursue your dreams smoothly:

  • Analytic problem solving skills.
  • Developing a habit of critical thinking.
  • Effective communication skills.
  • An impressive knowledge of the industry.

Grab an insight of this article in order to get a grasp of the stream of Market Analysis and how to become a Market Analyst! For more such informative blogs related to computer science and the evolving technologies of Python, Data Science, Big Data and AI, visit Dexlab Analytics. You can also follow us on Facebook and LinkedIn for any updates and queries about our courses and the teaching staffs.


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