Scorecard and its types ! An Overview !

Due to immense competition, creditors have been forced to boost revenue growth without increasing their overall risk. Thus, they are now opting for a more data driven approach by making use of scorecards to grant loans and monitor them throughout their lifetime. A scorecard turns into a tool for effective decision making when used in conjugation with other key metrics such as approval rates, profit, churn etc. A scorecard also allows the creditor to maintain a low processing cost on their loans.

Based on its purpose, a scorecard can be classified into following 3 types:

Application Scorecard – An application scorecard is a risk scorecard that allows creditors to select the customers from a pool of applicants. This scorecard does not identify good applications from bad applications on an individual basis but it provides creditors with a score which in turn determines the odds that an application will turn bad in the future. A creditor may devise different strategies for a high-risk applicant such as :

• Declining credit if risk is too high
• Assigning a lower credit limit in case of credit card or asking for a higher downpayment for mortgages
• Charging higher interest rates from such customers
• Putting such customers on a watchlist for potential/ suspected frauds

Alternatively, preferential treatments can be given to low-risk customers by awarding them with lower interest rates or higher credit limits.

Behaviour Scorecard – A risk scorecard can be used with existing clients on an ongoing basis. In such a case, Client’s existing performance with the creditor is used to predict the probability of an adverse behaviour or default in future. Based on the risk and profitability levels, custom treatment can be offered to such customers by :

• Offering new products and upgrades such as increase in limit of credit card
• Offering better pricing on certain products such as loans/ insurance
• Putting checks on fraudulent customers such as suspending phone services, cancelling expired cards etc.
• Directing delinquent transactions to stringent collection methods

Collection Scorecard – A customer might not be able to pay his entire credit in due time. In such cases, if the defaulted customer is unable to cure within a stipulated time, he is moved into “collections”. A collection scorecard is then deployed to determine the extent of recovery of outstanding balances from such customers. It helps the creditors to reduce write-offs and improve efficiency of collections/ recoveries by:

• helping creditors priortize and segment customers in an effective manner
• Identifying customers which can self-cure and decreasing collection costs
• creating more effective strategies for debt-collection