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Ai It HW MST Prac

The document discusses Credit Default Prediction using machine learning to forecast borrower default probabilities by analyzing creditworthiness and financial history. It highlights the importance of risk management, improved decision-making, and regulatory compliance while outlining objectives such as identifying high-risk customers and optimizing resource allocation. Additionally, it covers data sources, feature engineering, model selection, evaluation metrics, challenges, and the significance of predictive modeling for financial stability.

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Harsh Kalirawana
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24 views14 pages

Ai It HW MST Prac

The document discusses Credit Default Prediction using machine learning to forecast borrower default probabilities by analyzing creditworthiness and financial history. It highlights the importance of risk management, improved decision-making, and regulatory compliance while outlining objectives such as identifying high-risk customers and optimizing resource allocation. Additionally, it covers data sources, feature engineering, model selection, evaluation metrics, challenges, and the significance of predictive modeling for financial stability.

Uploaded by

Harsh Kalirawana
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CREDIT

DEFAULT
PREDICTION

SUB TI TL E : PR ED IC TIN G PR OB AB IL IT Y O F DE F AUL T USIN G MA CHI NE L EAR N IN G


INTRODUCTION TO
CREDIT DEFAULT
PREDICTION:
Credit Default Prediction uses machine
learning and statistical techniques
to forecast the likelihood of a borrower
defaulting on their debt. This process
involves analyzing a borrower's
creditworthiness, financial history, and other
relevant factors to predict their probability of
default.
IMPORTANCE:
1. Risk Management: Identifies high-
risk customers, minimizing financial losses.

2. Improved Decision-Making:
Enables informed lending and customized
financial products.

3. Resource Allocation: Efficiently


directs resources toward high-risk accounts.

4. Regulatory Compliance: Helps


meet necessary financial regulations.
IMPORTANCE:
5. Customer Relationship
Management: Allows proactive
engagement with at-risk customers.

6. Market Competitiveness: Enhances


strategies, reducing default rates.

7. Financial Stability: Contributes to


overall economic health by lowering default
rates.
Objectives :
• To Identify High-Risk Customers: Pinpoint individuals most likely to default on payments.
• To Enhance Decision-Making: Improve lending decisions based on predictive insights.

• To Optimize Resource Allocation: Direct efforts and resources toward managing at-risk
accounts.
• To Reduce Financial Losses: Minimize potential losses through proactive risk management.

• To Ensure Regulatory Compliance: Meet industry standards and regulations regarding credit
risk.
• To Improve Customer Engagement: Foster better communication and support for at-risk
customers.
• To Boost Profitability: Increase the overall profitability of lending operations by reducing default
rates.
Data Sources
Credit Card Default Dataset
A widely used dataset containing information on credit card holders, including payment
history and demographic data.

Kaggle
Various datasets related to credit risk and default prediction, often accompanied by
competitions and community discussions.

Government and Regulatory Agencies


Consumer Financial Protection Bureau (CFPB): Offers data on consumer credit, complaints,
and related statistics.

Banking and Financial Institutions


Many banks publish anonymized datasets for research purposes, often including customer
profiles and transaction histories.
Feature Engineering :
•Demographic Features:-
Age, income, employment status.
•Credit History Features:-
Credit score, total credit limit, credit utilization ratio,
number of credit accounts.
•Payment Behavior Features:-
Payment history, average payment delay,
minimum payment amount.
•Financial Ratios:-
Debt-to-income ratio, installment payment ratio.
•Transaction Features:-
Spending patterns, transaction frequency.
Model Selection :
•Logistic Regression:
Simple and interpretable; good for binary outcomes.

•Decision Trees:
Easy to interpret; handles nonlinear relationships and categorical
data well.
•Random Forest:
Ensemble method that improves accuracy by combining multiple
decision trees; robust to overfitting.

•Gradient Boosting Machines (GBM):


Powerful for predictive accuracy; focuses on correcting errors of
previous models.

•Neural Networks:
Suitable for complex patterns and large datasets; requires careful
tuning and more data.
Implementing Models in Python:

•Libraries to Use:
•Scikit-learn for machine learning
•TensorFlow/Keras for deep learning

CODE :
from sklearn.model_selection import train_test_split
from sklearn.ensemble import RandomForestClassifier
from sklearn.metrics import accuracy_score

# Load and prepare data


# Split data
# Train model
Model Evaluation :

•Accuracy:
•The proportion of correctly predicted instances
out of the total instances.
•Precision:
•The ratio of true positives to the sum of true and
false positives; indicates the quality of positive
predictions.
•Recall (Sensitivity):
•The ratio of true positives to the sum of true
positives and false negatives; measures the
model’s ability to identify actual defaults.
•Cross-Validation:
•Technique to evaluate model performance by
partitioning the data into subsets, training on
some while testing on others, to ensure
robustness.
Challenges :
•Data Quality:
Incomplete or inconsistent data can
lead to inaccurate predictions.
•Imbalanced Datasets:
A low proportion of defaults can skew
model performance and lead to biased
predictions.
•Feature Selection:
Identifying relevant features from a
large pool can be complex and time-
consuming.
•Overfitting:
Models may perform well on training
data but poorly on unseen data if not
properly validated.
Conclusion
Predictive modeling is crucial for managing credit default risks
and improving financial stability. The effectiveness of such
models relies on high-quality data, feature engineering, and
selecting the right models, evaluated across multiple metrics.
Addressing challenges like data imbalance and compliance,
while continuously updating models to reflect economic shifts,
ensures successful implementation. This approach helps
financial institutions make better decisions, reduce defaults, and
enhance profitability.
Group members
Mohit kanwar
24BCY70254
Harsh 24BCY70258
• Credit Bureaus:
• Agencies like Experian, Equifax, and
TransUnion provide aggregated credit data,
though access may require partnerships.
• Financial Market Data Providers:
• Companies like Bloomberg and Thomson
Reuters offer extensive financial datasets that
can be used for risk analysis.
• Academic Research:
• Research papers often include datasets for
credit risk analysis, available through
university repositories or data-sharing
platforms.
• Synthetic Data Generators:
• Tools like the Synthetic Data Vault (SDV) can
create realistic synthetic datasets for modeling
and testing.

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