Credit risk prediction with and without weights of evidence using quantitative learning models

Abstract

The credit risk assessment process is necessary for maintaining financial stability, cost and time efficiency, model performance accuracy, comparability analysis and future business implications in the commercial banking sector. By accurately predicting credit risk, highly regulated banks can make informed lending decisions and minimize potential financial losses. The purpose of this paper is to assess the power of conventional predictive statistical models with and without transforming the features to gain better insights into customer’s creditworthiness. The findings of the predicted performance of the logistics regression model are compared to the performance results of machine learning models for credit risk assessment using commercial banking credit registry data. Each model has its strengths and weaknesses, and where one model lacks, another performs better. The article reveals that simpler credit risk assessment techniques delivered outstanding performance while consuming less processing power and have given insights into the most contributing feature categories. Improving a conventional predictive statistical model using some of the feature transformations reduces the overall model performance, specifically for credit registry data. The logistics regression model outperformed all models with the highest F1, accuracy, Jaccard Index and AUC values, respectively.