Drivers of Individual Credit Risk of Retail Customers—A Case Study on the Example of the Polish Cooperative Banking Sector

Rafał Balina,Marta Idasz-Balina

doi:10.3390/risks9120219

Abstract

The main aim of the research was to determine the key factors determining the level of credit risk of individual clients (clients in the form of natural persons, excluding companies) on the example of Polish cooperative banks according to the following features: transaction characteristics, socio-demographic characteristics of the customer, the customer’s financial situation, the customer’s history of cooperation with the cooperative bank where they applied for a loan, and the customer’s history of cooperation with other financial institutions. For the research gathered data from 1000 credit applications submitted by individual customers when applying for a credit in five different cooperative banks were used for the analyses. To assess the credit risk of retail clients we use logit regression models, and additionally, score cards were calculated. The results of the research indicate that among the factors with high predictive power there were the features characterizing the client’s history of cooperation with the cooperative bank, where they applied for a loan. It may mean that when assessing credit risk related to financing individual customers, cooperative banks due to their local character, have an advantage over other financial institutions.

Highlights

An indispensable element of proper functioning of the financial market is to base it on a strong moral foundation (Shiller 2012)
Considering the above, the main goal of the research was to determine drivers of individual credit risk of retail customers on the example of Polish cooperative banks according to the following features: transaction characteristics, socio-demographic characteristics of a customer, a customer’s financial situation, a customer’s history of cooperation with the cooperative bank where they applied for a loan, and a customer’s history of cooperation with other financial institutions
Based on the results for the IV coefficient for the entire sample of bank customers, the following characteristics were the best predictors: Has the client defaulted on any obligations within 3 years from the date of application? (Yes/No), Does the applicant have a credit card limit [Yes/No], Current credit exposure (PLN), Does the client have an account with the Cooperative Bank? [Yes/No], Whether there is a community of property, Declared amount of the applicant’s burdens (PLN), Loan amount (PLN), Borrower’s main source of income, Occupation, Housing status, Debt to Income ratio (DtI) [%], Age of the main applicant, and Place of work

Summary

Introduction

An indispensable element of proper functioning of the financial market is to base it on a strong moral foundation (Shiller 2012) This is true in the banking sector, where the contradictions between the interests of the bank and the interests of the customer are increasingly noticeable. This is due to the transformation that took place in the banking sector at the beginning of the 21st century It affected the relationship between the bank and the customer within which there was a decline in trust in the banking sector, as customers increasingly found it difficult to recognize the bank as their direct partner (Iannotta et al 2007). Contemporary economic concepts from the field of game theory, behavioral approach or currents of institutional economics indicate this These theories assume an imperfect flow of information and knowledge, which in each of these theories is considered in a different context (Walter and Krenchel 2021). Information asymmetry is a roadblock to a mutually beneficial contract, because it leads either to fraud associated with moral hazard or to abandonment of a transaction by the party that feels misinformed

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