How Can Machine Learning Help Banks in Credit Risk Management?

These are changed times! Ever since the 2008 recession, banks and lending firms are undertaking several efforts to prevent other credit risks caused an economic crisis. The critical task is to figure out if the clients can repay the loan amount borrowed or not. And as days advance, following the traditional methods of assessing the documents, manual processing of socio-demographic data and verify the authenticity of these files does not sound practical anymore. And certainly obsolete when sifting through tonnes of such data records. Hence a smart risk management system has always been a top priority.

So to mitigate this, banks are now renewing their business models by employing technologies associated with Big Data, data availability, and Artificial Intelligence. Under machine and deep learning analysis, banks are now able to carry out a complex task like credit risk predictions, monitoring, model reliability, and predicting loan default probability. Machine learning algorithms enhance predictive abilities and can, therefore, help the lenders receive real-time insights about their current and potential borrowers. This shall allow them to disburse loans to the right set of clients, especially in countries with little or no past credit information.

Machine learning helps in maintaining transparency and improves overall accuracy by detecting instances of fraudulent activities or any potential anomalies taking place. It is also not new for banks to continually review high-risk accounts. Government watch-lists, news outlets, and sanction lists are monitored continuously by banks, and databases of suspicious customers are continuously reviewed to ensure the highest level of security. Machine and Ai can automate this process.

This is carried out using big data, where the algorithm identifies changes in withdrawal patterns. By analyzing the spending habits of a person's past, machine learning can more accurately predict if the actual customer is making a transaction or if it is fraudulent. As a result, it determines the degree of risks associated with a particular customer, unlike conventional statistical techniques that assign credit scores based on which a customer's loan application is either approved or rejected. Furthermore, in the case of high-risk activity, concerned authorities are alert to take immediate action against the defaulters.

Today when banks are spending a significant section of their financial resources in confirmation of the applicants' details and legitimacy, machine learning can save a vast amount of money if banks opt to leverage this technology to verify genuineness without any necessity for physical examination. It also reduces time to market, services like Robo-advisory, insurance underwriting, and better customer experience.

Without a doubt,the absorption of machine learning systems leads to providing banks a beneficiary and a superior edge. And the tendency to prevent another economic meltdown with the assurance that bank shall stay solvent, we as users shall also be at the advantageous end of this disruptive technology. And it also lets banks serve its large and diverse customers with the best experience and retain them.