Simplifying credit scoring rules using LVQ + PSO

Identifier:  imarina:5130746

Handle: https://hdl.handle.net/20.500.11797/imarina5130746

Authors:  Lanzarini, LC; Monte, AV; Bariviera, AF; Santana, PJ

Abstract:
One of the key elements in the banking industry relies on the appropriate selection of customers. To manage credit risk, banks dedicate special efforts to classify customers according to their risk. The usual decision-making process consists of gathering personal and financial information about the borrower. Processing this information can be time-consuming, and presents some difficulties because of the heterogeneous structure of data. This paper presents an alternative method that is able to generate rules that work not only on numerical attributes but also on nominal ones. The key feature of this method, called learning vector quantization and particle swarm optimization (LVQ+PSO), is the finding of a reduced set of classifying rules. This is possible because of the combination of a competitive neural network with an optimization technique. These rules constitute a predictive model for credit risk approval. The reduced quantity of rules makes this method useful for credit officers aiming to make decisions about granting a credit. It also could act as an orientation for borrower's self evaluation about her/his creditworthiness. This study develops a new method that combines a competitive neural network and an optimization technique. It was applied to a real database of a financial institution in a developing country.