Scorecard (statistical or expert) is a model whose aim is to predict certain events – most often client’s creditworthiness (i.e. probability that a client will fail to repay a loan). This can be estimated by applying a set of scores, which are subsequently used for ranking and/or sorting clients in different categories by their riskiness.
Scorecards can be applied in many different instances, such as:
Scorecards are employed in financial institutions as an integral part of credit risk assessment where they can be used on a stand-alone basis or in conjunction with other processes (e.g. mapping to the rating scale). In non-financial institutions, scorecards can be used to determine credit limits.
The development of applicational and behavioural scorecards is carried out in a close cooperation between ARM and its customers. The methodology selected for the purpose of the scorecard calculation, its preliminary results and subcomponents are presented to the customer and discussed during the development process. Therefore, the development of scorecards fully reflects the customer’s needs and usually consists of the following steps:
The validation of scorecards involves a set of processes and activities which attempt to prove the suitability and relevance of scorecards. ARM offers help with the process of validation, which typically covers the following areas:
ARM’s engagement in the process of scorecard validation results in a comprehensive report assessing various aspects of scorecards. The report lists all scorecard shortcomings and their sources identified within the validation process, as well as suggestions on how to fix them.
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