Rating Models and Validation - Oesterreichische Nationalbank

Rating Models and Validation
An essential qualitative element in retail credit assessment at the time of
credit application is socio-demographic data (age, profession, etc.). If the customer
relationship has existed for some time, it is advisable to assess the type
and history of the relationship.
Finally, the credit institution should also evaluate external data in the form
of credit reporting information (e.g. from the consumer loans register).
During the Credit Term
During the term of the credit transaction, the lender should evaluate activity
patterns in the customerÕs current account on the quantitative level. This will
require historical records of the corresponding account data. Examples of the
information to be derived from these data include overdraft days as well as debit
and credit balances, which make it possible to detect payment disruptions at an
early stage.
In addition, the general development of the customer relationship as well as
reminder and payment behavior should be observed on the qualitative level.
Credit assessments should also take account of any special agreements (e.g.
troubled loan restructuring, deferral) made with the borrower. If possible,
the lender should retrieve current credit reporting information from external
agencies on a regular basis.
Consumer Loans
Upon Credit Application
The procedure applied to consumer loans is analogous to the one used for current
accounts. In addition, the purpose of the loan (e.g. financing of household
appliances, automobiles, etc.) can also be included in credit assessments.
During the Credit Term
In this context, the procedure applied is analogous to the one used for current
accounts. The additional information to be taken into account includes the
credit stage and the residual term of the transaction. Practical experience has
shown that consumer loans are especially prone to default in the initial stage
of a transaction, which means that the default risk associated with a consumer
loan tends to decrease over time.
Credit Cards
Credit card business is quite similar to current accounts in terms of its risk level
and the factors to be assessed. For this reason, it is not entirely necessary to
define a separate segment for credit card business.
Upon Credit Application
In general, banks do not offer credit cards themselves but serve as distribution
outlets for credit card companies. However, as the credit institution usually also
bears liability if the borrower defaults, credit assessment should generally follow
the same approach used for current accounts.
30 Guidelines on Credit Risk Management