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Managing default risk as Prodigy grows

Nikola van der Linde - February 10, 2015

Risk Management Dangerous Safety Security Concept

Credit risk is synonymous with default risk. It is defined as the probability of suffering a financial loss due to a borrower’s failure to comply with their financial obligations. Credit Risk Management is the process whereby a financial institution mitigates these losses. During the risk management process, credit risks are identified, assessed and measured, and resources are deployed to mitigate or minimise them.

How do we manage credit risk?

At Prodigy Finance, there are four pillars of defence in the Credit Risk Management process: 

  1. Sophisticated predictive credit scoring models,
  2. Ongoing monitoring (both on an individual basis and on the portfolio),
  3. Legal reliability in terms of enforceability, and
  4. Community aspects.
Prodigy Finance is in the process of expanding its business to service more of the top global business schools. In doing so, the volumes of the portfolio will increase and with that, the efforts required to manage the risk in the portfolio.

Is risk management scalable?

When it comes to scalability of risk management processes, the main areas of focus are around data management and systems. The legal enforceability of contracts and the community aspects of the business are not affected by a growing portfolio. This article will therefore discuss the scalability of the first two pillars.

Creating a global scorecard

In a previous blog article about Prodigy's Predictive Scorecard we briefly discussed the workings of a typical scorecard. In reality, Prodigy Finance uses numerous scorecards that are all built on the same framework – that is, assessing a student’s profile, and predicting what the student’s expected post-study salary trajectory will be. Based on that, we can assess the student’s likely affordability for various loan sizes.

Each of the scorecards are tailored to the portfolio for which they were built. In other words, a student applies to study at one school and is assessed based on typical characteristics and historical performance of other students in that school. One way to enable the growth in the business with minimal operational impact would be to develop a global scorecard that assesses all students attending all schools – i.e. a truly global portfolio.

Our in-depth knowledge of the nuances within all of the sub-portfolios indicate that in order to measure the risk most accurately, the global scorecard would need to consider a school specific factor and regional or country-specific characteristics. This knowledge comes from having a large set of data to mine and analyse. It is therefore not only important to make sure the systems and resources are adequate to cater for increased application volumes, it is also vital that the business’ data management processes and systems are adequate.

Ongoing monitoring

Data is also used extensively in managing the risk in the portfolio on an on-going basis. Portfolio performance reporting is key in the risk management process. The business needs to know at any point which students are in default or are delinquent, which students are in arrangement and which students are performing as stipulated in their contractual agreements. This is necessary for day-to-day decision-making, but is also important on an historical level to ensure scorecards remain applicable and fit-for-purpose. Over time, populations can shift (for example, the average age of students attending a certain school might increase or decrease). In order to adjust for this, the business needs to at least be able to monitor it and track it over time.

Additionally, the economic circumstances across the world are constantly changing. These changes often feed into changes in the payment behaviour of borrowers. Tracking these changes are key to ensuring a consistent risk management framework is applied over time, and in ensuring the business is able to understand the impact of economic changes on portfolio performance.

In summary, in order to effectively manage the credit risk in a growing business, the focus will be on systems, data and reporting capabilities. This will enable us to build and maintain accurate scorecards and limit credit losses.

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