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Problem Statement 1

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84 views4 pages

Problem Statement 1

Uploaded by

kiran
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Problem Statement - I

Introduction
This assignment aims to give you an idea of applying EDA in a real business scenario. In

this assignment, apart from applying the techniques that you have learnt in the EDA

module, you will also develop a basic understanding of risk analytics in banking and

financial services and understand how data is used to minimise the risk of losing money

while lending to customers.

Business Understanding
The loan providing companies find it hard to give loans to the people due to their
insufficient or non-existent credit history. Because of that, some consumers use it to
their advantage by becoming a defaulter. Suppose you work for a consumer finance

company which specialises in lending various types of loans to urban customers. You
have to use EDA to analyse the patterns present in the data. This will ensure that the

applicants capable of repaying the loan are not rejected.

When the company receives a loan application, the company has to decide for loan
approval based on the applicant’s profile. Two types of risks are associated with the

bank’s decision:
If the applicant is likely to repay the loan, then not approving the loan results in a loss of

business
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If the applicant
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is not likely to repay the loan, i.e. he/she is likely to default, then

approving the loan may lead to a financial loss for the company.

The data given below contains the information about the loan application at the time of
applying for the loan. It contains two types of scenarios:

The client with payment difficulties: he/she had late payment more than X days on at
least one of the first Y instalments of the loan in our sample,
All other cases: All other cases when the payment is paid on time.

When a client applies for a loan, there are four types of decisions that could be taken by

the client/company):
Approved: The Company has approved loan Application

Cancelled: The client cancelled the application sometime during approval. Either the

client changed her/his mind about the loan or in some cases due to a higher risk of the

client, he received worse pricing which he did not want.


Refused: The company had rejected the loan (because the client does not meet their

requirements etc.).

Unused offer: Loan has been cancelled by the client but at different stages of the

process.
In this case study, you will use EDA to understand how consumer attributes and loan

attributes influence the tendency to default.

Business Objectives
This case study aims to identify patterns which indicate if a client has difficulty paying

their instalments which may be used for taking actions such as denying the loan,

reducing the amount of loan, lending (to risky applicants) at a higher interest rate, etc.
This will ensure that the consumers capable of repaying the loan are not rejected.
Identification
upGrad & IIITB |of such applicants using EDA is the aim of this case study.
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In other words, the company wants to understand the driving factors (or driver

variables) behind loan default, i.e. the variables which are strong indicators of default.
The company can utilise this knowledge for its portfolio and risk assessment.

To develop your understanding of the domain, you are advised to independently research

a little about risk analytics - understanding the types of variables and their significance

should be enough.

Data Understanding
Download the dataset from below.

Dataset Download

This dataset has 3 files as explained below:

1. 'application_data.csv' contains all the information of the client at the time of

application.

The data is about whether a client has payment difficulties.

2. 'previous_application.csv' contains information about the client’s previous loan data. It

contains the data on whether the previous application had been Approved, Cancelled,

Refused or Unused offer.

3. 'columns_description.csv' is data dictionary which describes the meaning of the variables.


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