Risk Assessment Model Based on Discriminant Analysis

A risk assessment model (RAM) is necessary to avoid the limitations associated with a simplistic and broad classification of applicants into a "good" or "bad" category. The absence of appropriate weights in the current evaluation system triggers the need for the development of the comprehensive model based on proven statistical application. Literature survey undertaken brought to surface 28 parameters that need to be taken into account while evaluating a prospect. These parameters were classified under four heads namely credit, operations, liquidity and market risks. Weights developed in this study were based on a conceptual understanding and the importance attached by people proficient in this area. A questionnaire was developed and a judgmental survey was conducted for this purpose amongst various credit officers extending commercial vehicle and construction equipment financing. The sample size was 117 small and medium corporate clients.The existing model was able to classify 28 records correctly. So the predictive power of the original/existing model was about 80%. The proposed/new model is able to classify 30 records correctly. So the predictive power of the propose/new model is 85.71%.