Consumer finance company which specialises in lending various types of loans to urban customers. When the company receives a loan application, the company has to make a decision for loan approval based on the applicant’s profile.
Two types of risks are associated with the bank’s decision:
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If the applicant is likely to repay the loan, then not approving the loan results in a loss of business to the company
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If the applicant is not likely to repay the loan, i.e. he/she is likely to default, then approving the loan may lead to a financial loss for the company.
The company wants to understand the driving factors (or driver variables) behind loan default, i.e. the variables which are strong indicators of default. The company can utilise this knowledge for its portfolio and risk assessment.