Analysis of Credit Risk Measurement Models in the Evaluation of Credit Demands

Abstract

The mission of the loan associations is simply to convert deposits collected with lower interest rates, into credits with higher interest rates. However, return of this cycle involves high potential of risk. In order to minimize the risk, several financial models are utilized. Since these models are insufficient, new models are required to be developed. The purpose of this study is to compile literature reviews on credit risk measurement methods used for assessment of credit demands. The method used is literature scan. This scan was conducted with printed publications and articles from the databases scanned. The information is compiled from these sources. It is discussed that risk mitigation should be given importance instead of guarantee, for evaluation of credit demands with Basel II criteria. A credit requesting entity's future prediction by examining financial statements can only be possible utilizing financial statements analysis techniques (comparative financial statements analysis, vertical analysis, ratio analysis and cash flow statements) together. As a consequence, in 2009 a software ,named “Scoring Model” has been developed for giving credit decisions which uses the techniques together mentioned above. This software merely based on a model is proposed to be integrated into banking system after being reprogrammed as commercial software.