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Credit risk prediction based on loan profit: Evidence from Chinese SMEs

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  • Li, Zhe
  • Liang, Shuguang
  • Pan, Xianyou
  • Pang, Meng

Abstract

Credit risk prediction should maximize a bank’s loan profit. This paper performs modified profit-based logistic regression (MPLR) by constructing an objective function with the maximum profit as the objective. The optimal weights of two kinds of samples are obtained by constructing an objective function based on the sum of the weighted profit acquired in default and nondefault cases. To obtain greater loan profit, each customer's optimal discrimination threshold is determined by comparing the expected profit that the customer is predicted to produce in the default and nondefault scenarios. The research results show that the predicted and real profits obtained by our model are significantly higher than those obtained by 16 other classification models. The utilized weights can improve the accuracy and profit of the MPLR model, but the discrimination threshold is more important than the weights. The sample balancing process may not necessarily improve the classification accuracy and profit because it can reduce the Type-II error while increasing the induced Type-I error.

Suggested Citation

  • Li, Zhe & Liang, Shuguang & Pan, Xianyou & Pang, Meng, 2024. "Credit risk prediction based on loan profit: Evidence from Chinese SMEs," Research in International Business and Finance, Elsevier, vol. 67(PA).
    • Handle: RePEc:eee:riibaf:v:67:y:2024:i:pa:s0275531923002817
    DOI: 10.1016/j.ribaf.2023.102155
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    Cited by:

    1. Xing, Jin & Chi, Guotai & Pan, Ancheng, 2024. "Instance-dependent misclassification cost-sensitive learning for default prediction," Research in International Business and Finance, Elsevier, vol. 69(C).

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    More about this item

    Keywords

    Credit risk prediction; Discrimination threshold; Customer weights; Loan profit; Modified profit logistic regression;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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