Can credit scoring models prevent default payments in the banking industry in the period of financial crisis?

Abstract

Credit scoring is a scientific method of assessing the credit risk associated with new credit applications as well as for monitoring of the credit risk in the process of the loan payment. Therefore credit scoring models developed in the banks based on their internal information system, as well as the credit info system in the country, can help the banks to ensure more consistent underwriting and can provide management with a more insightful measure of credit risk. While credit scoring could be a valuable risk management tool in virtually any bank setting, it is probably not wide accepted in the banks with more fundamental underwriting problems such as inexperienced loan officers, inadequate credit procedures, underdeveloped internal and external credit info – system , persistent arrears problems, etc. However credit scoring is only useful , and can make reliable predictions , if the credit scoring models are properly made, data base updated and credit scoring limitations are properly understood, which is very difficult in the turbulent economic environment as it is the world economy in the recent years. Therefore, the paper objective is to analyze if the banking industry can prevent credit default payments through the implementation of the credit scoring models and what are the parameters and the weights that need to be incorporated, so that the models to be more effective in the period of financial crises.