A bank wants to pilot a new product, a short-term credit line with the limit of £25,000, 1 month at 2% per month. More so, assume that the client who was issued credit and repaid it will more likely use your bank for similar short-term financing needs in the future, which has an additional lifetime value (CLV) of 1,000. However, if the client will default, then the bank will be able to recover only 20,000 out of 25,000 granted.
- if the credit is issued and repaid, then the bank earns a profit of 25,000*2% + 1,000 = 1,500
- if the credit is granted but the client defaults, then the bank loses 25,000 - 20,000 = 5,000;
- if the credit is not issued, then profit = loss = 0.
- Defaults on the previously issued credit is not your problem
- All the clients who will be offered the credit line will use it in full
- Your cost of capital is 0
The bank collected data on 25,000 of their existing clients. Of those, 1,000 were randomly selected to participate in a pilot described below. Data about the remaining 24,000 is in the file “Credit_data.csv”. The dataset contains various information, including demographic factors, credit data, history of payment, and bill statements from April to September, as well as information on the outcome: did the customer default or not in October.