Quest for a Credible Model in Lending Evaluation

This book examines potential income as an additional independent variable that will complement credit history to predict loan repayment with applicable interest. Lending exposures constitute the most material risk concentrations within banks, and this book contributes to the literature on lending risk management within banks and other lending institutions. Risk management theories have provided emphatic guidelines for risk control and management of banks loans, yet the results of other studies indicate that the credit evaluation models do not fully explore all available predictors of loan repayment. This deprives the models of total efficiency at predicting loan repayment with applicable interest, and leads to accretion in the nonperforming loans portfolio. It also leads to inequitable credit rationing practices. The resultant effect is a decrease in both investment and consumer spending that stimulates macroeconomic activities. This book suggests a policy prescription for lenders: consideration should be given to both credit history and potential income in loan decision making.