{"id":22749,"date":"2021-04-19T07:25:00","date_gmt":"2021-04-19T07:25:00","guid":{"rendered":"https:\/\/www.experfy.com\/blog\/improve-credit-risk-management-ai-banking\/"},"modified":"2023-08-26T06:20:09","modified_gmt":"2023-08-26T06:20:09","slug":"improve-credit-risk-management-ai-banking","status":"publish","type":"post","link":"https:\/\/www.experfy.com\/blog\/fintech\/improve-credit-risk-management-ai-banking\/","title":{"rendered":"How To Improve Credit Risk Management: AI For Banking"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"22749\" class=\"elementor elementor-22749\" data-elementor-post-type=\"post\">\n\t\t\t\t\t\t<section class=\"has_eae_slider elementor-section elementor-top-section elementor-element elementor-element-3b49919 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"3b49919\" data-element_type=\"section\" data-e-type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"has_eae_slider elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-bd0bf94\" data-id=\"bd0bf94\" data-element_type=\"column\" data-e-type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-1fa0357 elementor-widget elementor-widget-text-editor\" data-id=\"1fa0357\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>Loan granting reminds Russian roulette \u2014 you never know when it shoots. However, a bank can calculate credit risks and reduce the number of possible bad loans, while a player can\u2019t.&nbsp;<\/p>\n<p>In this article, we decided to compare traditional credit risk management processes with the modern artificial intelligence (AI) approach. Technologies never stand still; companies that implement top-notch solutions and partner with fintech organizations have a huge market advantage. Let\u2019s discover the pros and cons of a traditional credit risk management process and realize how artificial intelligence tackles the disadvantages of the old system.&nbsp;<\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-027d043 elementor-widget elementor-widget-heading\" data-id=\"027d043\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\">What is Credit Risk Management: Pros &amp; Cons<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-b8a839a elementor-widget elementor-widget-text-editor\" data-id=\"b8a839a\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>If you\u2019re looking for ways to empower your credit risk management, you 100% know what credit risk means. But, just in case, let\u2019s explain a little;&nbsp;<a href=\"https:\/\/en.wikipedia.org\/wiki\/Credit_risk#:~:text=A%20credit%20risk%20is%20risk,failing%20to%20make%20required%20payments.&amp;text=A%20consumer%20may%20fail%20to,fixed%20or%20floating%20charge%20debt.\" target=\"_blank\" rel=\"noreferrer noopener\">credit risk<\/a>&nbsp;is a simple term that refers to risks that a bank takes lending out money. The majority of banks and financial organizations can\u2019t fully assess whether a borrower returns the money or not. Moreover, sometimes an economic shift plays a bad game with borrowers who have always been paying on time. As a result, a bank loses money. So, how do banks reduce the number of bad loans? They manage their credit risks. And the majority of businesses start implementing AI solutions.&nbsp;<\/p>\n<p>Today\u2019s competition in the banking market is strong \u2014 the number of only&nbsp;<a href=\"https:\/\/www.statista.com\/statistics\/184536\/number-of-fdic-insured-us-commercial-bank-institutions\/#:~:text=In%202019%2C%20there%20were%204%2C519,insured%20banks%20in%20the%20country.\" target=\"_blank\" rel=\"noreferrer noopener\">FDIC-insured commercial banks<\/a>&nbsp;in the U.S. exceeds 4,000, not to mention the uninsured. And their number is declining from year to year.&nbsp;<\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-2d3f0ba elementor-widget elementor-widget-text-editor\" data-id=\"2d3f0ba\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<figure class=\"aligncenter\"><img decoding=\"async\" src=\"http:\/\/www.experfy.com\/blog\/wp-content\/uploads\/2021\/05\/1.jpg\" alt=\"How To Improve Credit Risk Management: AI For Banking\" class=\"wp-image-186\"\/><\/figure>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-a1b7e76 elementor-widget elementor-widget-text-editor\" data-id=\"a1b7e76\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>One of the main aspects contributing to the competitiveness and existence of banks and alternative lenders is credit risk management. Banks, traditionally, set credit risk parameters, according to the financial opportunities, and provide loans only to clients within this number. It\u2019s a practice of loss reduction when a credit risk manager identifies risk factors and selects measures to manage loan activities in the future.&nbsp;<\/p>\n<p><strong>Advantages of Credit Risk Management:<\/strong><\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-670149f elementor-widget elementor-widget-text-editor\" data-id=\"670149f\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<ul><li>Ability to measure and predict the risks of any single application.<\/li><li>Allows banks planning strategies ahead to avoid a negative outcome.&nbsp;<\/li><li>Using various credit scoring models, it\u2019s possible to figure out the best ones for the business and determine the level of risk while lending.&nbsp;<\/li><\/ul>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-bcdcc4d elementor-widget elementor-widget-text-editor\" data-id=\"bcdcc4d\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>Thus, risk management banking allows them to withstand the competition on the market and not to drown in unrepaid loans.&nbsp;<\/p>\n<p><strong>Disadvantages of Traditional Credit Risk Management:&nbsp;<\/strong><\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-602eeaa elementor-widget elementor-widget-text-editor\" data-id=\"602eeaa\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<ul><li>Risk predictions do not guarantee low percentages of bad loans; the approach isn\u2019t scientific, so the results might be judged in several ways.&nbsp;<\/li><li>Outdated systems can overlook various factors and thus make incorrect predictions about certain borrowers.<\/li><li>Financial losses due to the failure of a credit risk model.<\/li><li>A long period of time between a loan application, its approval, and issuance.<\/li><li>Credit scoring models may provide completely different scoring results, complicating the lending process.&nbsp;<\/li><li>The cost and work of the majority of credit scoring models are questionable.&nbsp;<\/li><\/ul>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-18d1e89 elementor-widget elementor-widget-text-editor\" data-id=\"18d1e89\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>Lack of modern risk assessment tools and limited view of risk measures lead to incorrect analysis of a borrower\u2019s abilities to pay back. It\u2019s crucial for either banks or small lending organizations to completely understand a loan loss reserve to measure credit risks. As a result, traditional scorecards by credit risk managers are no longer enough to recognize bad borrowers among the others.&nbsp;<\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-414b150 elementor-widget elementor-widget-heading\" data-id=\"414b150\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\">How does AI Assist Credit Risk in Banks?<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-e2514fc elementor-widget elementor-widget-text-editor\" data-id=\"e2514fc\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>With the rising popularity of virtual assistants, self-driving vehicles, and automated management systems, AI in combination with machine learning (ML) takes over more and more business domains. It remains a high technology for digital credit scoring. Combining artificial intelligence with traditional credit scoring helps to run and analyze various data points on borrowers, including historical and transactional. Covering more data, you can predict a borrower\u2019s behavior, improve the accuracy of banking processes, and shorten the time of loan decision-making.&nbsp;<\/p>\n<p>According to&nbsp;<a href=\"https:\/\/www.finance-monthly.com\/2019\/02\/ai-to-outperform-human-credit-decisions-by-2024\/\" target=\"_blank\" rel=\"noreferrer noopener\">Finance Monthly<\/a>, 31% of respondents think that non-traditional data lead to better credit scoring. While 14% of the market professionals prove that AI scoring systems already outperform human-based ones. There are also respondents who guess that a broader range of data reduces subjectivity. However, users can easily exclude unnecessary parameters from the analysis or create a custom business solution.&nbsp;<\/p>\n<p><strong>Let\u2019s consider the benefits of using AI for credit and risk management.&nbsp;<\/strong><\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-0628b2e elementor-widget elementor-widget-text-editor\" data-id=\"0628b2e\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<figure class=\"aligncenter\"><img decoding=\"async\" src=\"http:\/\/www.experfy.com\/blog\/wp-content\/uploads\/2021\/05\/2-1.png\" alt=\"ai-benefits-for-credit-risk\" class=\"wp-image-174\"\/><\/figure>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-87b1540 elementor-widget elementor-widget-text-editor\" data-id=\"87b1540\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<ul><li><strong>Error-free.<\/strong>&nbsp;The traditional method applied by banks and financial institutions is not error-free. Mistakes might lead to failure to recognize potential defaulters, as well as you can reject an applicant who might be valuable for the organization. AI can better process a huge amount of data and identify patterns and creates as much error-free credit risk management as possible.&nbsp;<\/li><li><strong>Reduction of credit management time.<\/strong>&nbsp;Financial institutions and banks spend a significant amount of time to physically verify applications. Artificial intelligence significantly reduces time to market. For example, the&nbsp;<a href=\"https:\/\/ginimachine.com\/blog\/banking-today-risk-management-with-ai\/\" target=\"_blank\" rel=\"noreferrer noopener\">GiniMachine solution can verify 1,000 applicants in 10 seconds<\/a><strong>.<\/strong>&nbsp;This significantly changes credit management time.&nbsp;&nbsp;<\/li><li><strong>Automated process.&nbsp;<\/strong>Organizations and banks, working in a traditional way, usually have to hire a quality team able to deal with <a href=\"https:\/\/www.experfy.com\/blog\/bigdata-cloud\/the-role-of-big-data-in-finance-software-vendors-overview\/\" target=\"_blank\" rel=\"noreferrer noopener\">big data<\/a> and generate reports. But AI can automate the whole process practically eliminating human participation in credit risk scoring. This allows banks to set free people with other vital tasks, or cut staff.&nbsp;<\/li><li><strong>Reduction in credit losses<\/strong>. The main goal of credit risk management tools is to predict delinquencies before they occur, take timely actions to reduce credit losses. While AI can predict delinquencies for a year in advance. The only thing is that you have the right data necessary to build a model.&nbsp;&nbsp;<\/li><li><strong>Accuracy in predictions<\/strong>. Traditional scoring models might be tight since they function according to clearly defined parameters. AI solutions are intuitive; the more new datasets they analyze, the better they learn, coming up with more accurate predictions.&nbsp;<\/li><\/ul>\n<ul><li><strong>Error-free.<\/strong>&nbsp;The traditional method applied by banks and financial institutions is not error-free. Mistakes might lead to failure to recognize potential defaulters, as well as you can reject an applicant who might be valuable for the organization. AI can better process a huge amount of data and identify patterns and creates as much error-free credit risk management as possible.&nbsp;<\/li><li><strong>Reduction of credit management time.<\/strong>&nbsp;Financial institutions and banks spend a significant amount of time to physically verify applications. Artificial intelligence significantly reduces time to market. For example, the&nbsp;<a href=\"https:\/\/ginimachine.com\/blog\/banking-today-risk-management-with-ai\/\" target=\"_blank\" rel=\"noreferrer noopener\">GiniMachine solution can verify 1,000 applicants in 10 seconds<\/a><strong>.<\/strong>&nbsp;This significantly changes credit management time.&nbsp;&nbsp;<\/li><li><strong>Automated process.&nbsp;<\/strong>Organizations and banks, working in a traditional way, usually have to hire a quality team able to deal with <a href=\"https:\/\/www.experfy.com\/blog\/bigdata-cloud\/the-role-of-big-data-in-finance-software-vendors-overview\/\" target=\"_blank\" rel=\"noreferrer noopener\">big data<\/a> and generate reports. But AI can automate the whole process practically eliminating human participation in credit risk scoring. This allows banks to set free people with other vital tasks, or cut staff.&nbsp;<\/li><li><strong>Reduction in credit losses<\/strong>. The main goal of credit risk management tools is to predict delinquencies before they occur, take timely actions to reduce credit losses. While AI can predict delinquencies for a year in advance. The only thing is that you have the right data necessary to build a model.&nbsp;&nbsp;<\/li><li><strong>Accuracy in predictions<\/strong>. Traditional scoring models might be tight since they function according to clearly defined parameters. AI solutions are intuitive; the more new datasets they analyze, the better they learn, coming up with more accurate predictions.&nbsp;<\/li><\/ul>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-5a02a46 elementor-widget elementor-widget-text-editor\" data-id=\"5a02a46\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>Artificial intelligence brings great efficiency to credit risk management reducing time to market. In addition, it strengthens fraud detection mechanisms making your bank more appealing for liable borrowers.&nbsp;<\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-24c0d38 elementor-widget elementor-widget-heading\" data-id=\"24c0d38\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\">Wrapping it Up<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-02c5d94 elementor-widget elementor-widget-text-editor\" data-id=\"02c5d94\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>There is no doubt that credit risk management with AI becomes a key area for banks and financial organizations. It solves practically all issues caused by traditional scorecards improving banking workflow. Risks will continue to grow, and AI can almost completely reduce them. So, it\u2019s time for your business to embrace the potential of artificial intelligence in credit scoring.&nbsp;<\/p>\n<p><strong>Source: <\/strong><a href=\"https:\/\/ginimachine.com\/blog\/ai-credit-risk-management\/\" rel=\"noopener\">https:\/\/ginimachine.com\/blog\/ai-credit-risk-management\/<\/a>&nbsp;<\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>There is no doubt that credit risk management with AI becomes a key area for banks and financial organizations. It solves practically all issues caused by traditional scorecards improving banking workflow.<\/p>\n","protected":false},"author":1109,"featured_media":23328,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","footnotes":""},"categories":[192],"tags":[97,132,1505,99,1259],"ppma_author":[3662],"class_list":["post-22749","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-fintech","tag-artificial-intelligence","tag-banking","tag-credit-risk","tag-fintech","tag-management"],"authors":[{"term_id":3662,"user_id":1109,"is_guest":0,"slug":"dolgorukov","display_name":"Dmitry Dolgorukov","avatar_url":"https:\/\/www.experfy.com\/blog\/wp-content\/uploads\/2021\/05\/Dmitry-Dolgorukov-150x150.jpeg","user_url":"https:\/\/hesfintech.com\/","last_name":"Dolgorukov","first_name":"Dmitry","job_title":"","description":"Dmitry Dolgorukov is a Co-Founder and a CRO of <a href=\"https:\/\/hesfintech.com\/\" target=\"_blank\" rel=\"noopener\">HES FinTech<\/a>,and CEO at <a href=\"https:\/\/ginimachine.com\/\" target=\"_blank\" rel=\"noopener\">GiniMachine<\/a>- an AI-driven platform that solves traditional credit scoring challenges with machine learning algorithms. He is a member of the Forbes Finance Council since 2020. He was ranked as one of the most influential AI leaders in Eastern Europe in 2019, and as one of the top 200 Fintech leaders in Europe in 2018."}],"_links":{"self":[{"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/posts\/22749","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/users\/1109"}],"replies":[{"embeddable":true,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/comments?post=22749"}],"version-history":[{"count":4,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/posts\/22749\/revisions"}],"predecessor-version":[{"id":31544,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/posts\/22749\/revisions\/31544"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/media\/23328"}],"wp:attachment":[{"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/media?parent=22749"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/categories?post=22749"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/tags?post=22749"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/ppma_author?post=22749"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}