Risk is inherent in all aspects of commercial operations. However, for banks and financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore arises from the bank's dealings with or lending to corporate, individuals, and other banks or financial institutions.
Credit assessment systems help banks and lending organizations to avoid credit loss and at the same time maximizing business opportunities by enabling them to make calculated, objective, and swift risk decisions. As any credit manager in the banking industry knows, controlling risk is a delicate business. Too much credit exposure can lead to high default rates and charge-off percentages
；
too little exposure often means lost business and revenue. A credit assessment system help banks manage this balancing act and provides fast, accurate credit scoring for various consumer-lending products.There is a wide range of strategies for measuring the credit worthiness of new and existing customers in the banking industry, but many of them have serious limitations. Outsourced strategies can lead to long development cycles or high annual expenditures. Makeshift in-house scoring strategies often lack the ability to access necessary data for accurate scoring, leaving credit managers with no effective way to identify how much potential income or loss rides on their decisions.
Credit assessment is an independent statistical evaluation of an individual's or organization's ability to repay debt based on the borrowing and repayment history. If one has always paid bills and loan installments on time, he is more likely to have good credit rating and therefore may receive favorable terms on a loan or credit card, such as relatively low finance charges. However if the credit assessment is negative or poor because of defaulted payments, individual or organization may be offered less favorable terms or may be denied credit altogether.
A corporation's credit rating is an assessment of whether it will be able to meet its obligations to bond holders and other investors. Credit rating systems for corporations generally range from AAA or Aaa at the high end to D (for default) at the low end.
In recent times such decision making has become very complex due to the involvement of hundreds of variables and huge volumes of data. The solution is the use of Credit assessment systems. Credit assessment systems are automated computer-based systems that help lending organizations make decisions on whether to approve or disapprove credit application from credit seekers. Credit assessment systems employ large databases and highly powerful and statistically strong software to analyze the data to determine the credit worthiness of potential borrowers.
Many off-the-shelf credit scoring systems are available to banks and financial institutions. Many of these systems have reasonable customization provisions. A good scoring system provides for risk reduction and makes the bank's offer more attractive in an exceptionally demanding market of banking products. Moreover, the scoring systems enable faster response to the market needs
Information Technology in Financial Services | Reference Book 2
and allow building a competitive advantage.
In general such scoring systems consist of the following
components/modules (which may have different names in different actual products
)：
■ APS (application processing system) - in charge of the information flow within the system and the logic of credit application processing from the time of conversation with a client, through application collection, application verification, processing and evaluation, decision making and finally to agreement signing and funds disbursement.
_ MSP (models, strategies and procedures) - a set of definition tools allowing to build models of system structures.
■ Scoring Engine - generates an automated credit recommendation to the application, based on the evaluation and decision-making strategy adopted in the MSP definition module.
■ CBS (Customer Behavioral Scoring) - provides a behavioral scoring functionality.
A possible application processing flow which reflects the actual route it follows at the banks
：
1. Credit Simulator enables preliminary product selection and estimation of client financial capacity, based on the elementary data, without having to register the complete credit application (determination of unofficial preliminary worthiness
)；
2. Credit application is entered into the system using defined screen forms or imported in electronic form from available distribution channels (email, web etc
.)；
3. The client's data listed in the application is completed by information collected from the bank's internal resources and external systems (e.g. Credit Bureau
)；
4. The application is scored based on the scoring cards and strategy. An automated credit recommendation is determined
；
5. When the application is accepted, a credit agreement is generated and the information is automatically forwarded to target systems (e.g. funds disbursement, credit card preparation etc.).
Information Technology in banking sector 66 While all components are important as each performs a valuable function two components are worth mentioning
：
Behavioral Scoring
CBS (Customer Behavioral Scoring) component provides a behavioral scoring functionality
：
imports data, carries out verification, defines aggregates based on the data from any number of accounts of a given type and communicates with the scoring engine. The behavioral scoring results are available for the purposes of the credit application scoring carried out by APS component.Integration with environment
The system is equipped with a set of standard interfaces providing data exchange with the scoring engine, Credit Bureau database, stolen identification cards database and unreliable clients databases. Integration with other dedicated data sources is also possible e.g. FIA and other law enforcing agencies and NADRA etc.
eClB The role of Credit Information Bureau is integral to credit risk management and the promotion of a sound credit culture in financial system. The existence of well functioning credit bureau promotes prudence and professionalism among financial institutions, adoption of best business practices and making informed and responsible lending
decisions in timely manners.
In Pakistan the Credit Information Bureau (CIB) was established ir Functions and activities of CIB are being governed under Section 25(1 Banking Companies Ordinance-1962. Ever since its inception, the Pakistan has been playing a pivotal role in gathering, organizing disseminating critical information relating to credit-worthiness borrowers to assist financial
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institutions in their lending decisions averting the occurrence of default. Financial institutions started submitting their borrowers/ data of RsjI million
& above on quarterly basis. Subsequently the frequency oli submission was shifted from quarterly to monthly basis. In April 2003,.! enhanced the coverage and effectiveness of CIB by introducing online facilities. CIB was the first bureau of the region introducing 1 facility to its member financial institutions. This development financial institutions to upload their data directly into eClB syster. also generate online CIB reports.
With the growing complexities and emerging challenges on the landscape, the role of CIB has become even more critical. The CIB aflj has responded positively to new challenges. From the earlier manually operated data system, the CIB at SBP has evolved into sophisticated and hi-tech entity using state-of the-art technc perform its crucial functions more efficiently. The strengthened and improved operational efficiency has enabled the CIB to significantly the scope of reporting by doing away with the minir of Rs. 500,000. The purpose is to capture the diverse cate borrowers in view of growing exposure of banks to consumers, ac and SMEs.
The revamped eClB has been operational since 2003. Existing eClB! has been designed in line with best international credit sharing around the world. The eClB database has now been capturing 4 million borrowers/ records of about
100 member financial ins
The key improvements of the new system also include
：
_ Separation of Consumer and Corporate reports as well as formats ■ Provisions for consumer credit and default history.
_ Improved efficiency in terms of speed, reliability and security j data in order to reduce the processing cost/time of FIs
■ The new CIB system has been built on latest state of technology which includes high capacity servers, security broader bandwidth, point to point data encryption, web capturing software having ability to capture the data from i level etc.
■ Provisions for online amendments and updations for the FIs.
Incorporation of large number of validation rules on data capturing application to ensure integrity and accuracy of the submitted data.
■ Automated support and help to the FI users.
The improved capacity and scope of the CIB is expected to deliver the following benefits
：
The eClB database has greatly expanded outreach to a large number of borrowers who until now remained untapped because of the limit of Rs 500,000/- for reporting purposes. This has important implications with regard to credit expansion to low-value borrowers of SMEs, agriculture and consumer finance sectors. The financial institutions, access to credit profile of these
borrowers will not only encourage them to grant loans more willingly to worthy borrowers but also would help assess their overall credit risk exposure. This, in turn, will serve to reduce the system's vulnerability to financial
instability.
The new-look CIB has made possible for banks to meet the credit needs of the emerging sectors on sustainable basis by applying prudent and objective analysis of borrowers/ credit profiles. This will also be a helpful to those
borrowers, who could not access bank lending because of lack of adequate collaterals. The strengthened CIB also helps in further boosting the supervisory capacities with greater access to more reliable and detailed information. All in all, the reinvigorated CIB is expected to benefits all the stakeholders' viz. financial institutions, borrowers and regulators to the ultimate goal of sound financial system.