Dependence of a Loan Portfolio Structure on a Cut-Off Level in a Scoring Model

Abstract

The study aims to validate a mathematical model of influence of applications’ selection process on a loan portfolio structure expected by the end of a planned period. When predicting risks and profitability of a loan portfolio, many authors use a mathematical model of a loan portfolio in the form of a Markov chain with discrete time. This model usually does not consider the process of attracting new customers. The present paper proposes a more complete model for changing a loan portfolio structure in the form of a Markov chain taking into account a procedure of attracting new customers and selecting them based on the credit rating. The main advantage of this scheme is that it allows taking into consideration the change in a cut-off level when using a scoring model of customer selection. This provides an opportunity to predict dynamics of the volume and structure of a loan portfolio depending on the selected cut-off level under sufficiently stable economic conditions