Teclov : Loan Analysis
Problem Statement
Introduction
Solving this case study will give you an idea about how real business
problems are solved using EDA. In this case study, apart from applying the
techniques you have learnt in EDA, you will also develop a basic
understanding of risk analytics in banking and financial services and
understand how data is used to minimise the risk of losing money while
lending to customers.
Business Understanding
You work for a 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:
• If the applicant is likely to repay the loan, then not approving the
loan results in a loss of business to the company
• 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 data given contains the information about past loan applicants and
whether they ‘defaulted’ or not. The aim is to identify patterns which
indicate if a person is likely to default, which may be used for taking
actions such as denying the loan, reducing the amount of loan, lending (to
risky applicants) at a higher interest rate, etc.
In this case study, you will use EDA to understand how consumer
attributes and loan attributes influence the tendency of default.
When a person applies for a loan, there are two types of decisions that
could be taken by the company:
1. Loan accepted: If the company approves the loan, there are 3
possible scenarios described below:
◦ Fully paid: Applicant has fully paid the loan (the principal and
the interest rate)
◦ Current: Applicant is in the process of paying the instalments,
i.e. the tenure of the loan is not yet completed. These
candidates are not labelled as 'defaulted'.
◦ Charged-off: Applicant has not paid the instalments in due
time for a long period of time, i.e. he/she has defaulted on the
loan
2. Loan rejected: The company had rejected the loan (because the
candidate does not meet their requirements etc.). Since the loan was
rejected, there is no transactional history of those applicants with the
company and so this data is not available with the company (and thus
in this dataset)
Business Objectives
This company is the largest online loan marketplace, facilitating personal
loans, business loans, and financing of medical procedures. Borrowers can
easily access lower interest rate loans through a fast online interface.
Like most other lending companies, lending loans to ‘risky’ applicants is
the largest source of financial loss (called credit loss). The credit loss is the
amount of money lost by the lender when the borrower refuses to pay or
runs away with the money owed. In other words, borrowers
who defaultcause the largest amount of loss to the lenders. In this case, the
customers labelled as 'charged-off' are the 'defaulters'.
If one is able to identify these risky loan applicants, then such loans can be
reduced thereby cutting down the amount of credit loss. Identification of
such applicants using EDA is the aim of this case study.
In other words, 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.
To develop your understanding of the domain, you are advised to
independently research a little about risk analytics (understanding the
types of variables and their significance should be enough).
