During the last decade, importance of risk management in credit has increased for both borrowers and lenders, especially, in the developing countries. For this reason, banks and financial institutions started to revise their lending policies. There are basically six functional responsibilities associated with credit lending activities; assessment of the customers credit risk, making the credit granting decision with regard to credit terms and, where relevant, credit limits, collecting receivables (debts) as the fall due and taking action against defaulters, monitoring customer behavior and compiling management information, bearing the risk of defaultor bad debt, financing the investment in receivables (debtor) (Summer and Wilson, 2000).
This study deals with the fourth step of credit lending activities. Thus, the study focuses on collecting statistical data on consumer behavior, evaluating the collected data and trying to find managerial outcomes. These outcomes enable financial institutions to evaluate alternative lending policies and minimize their credit default risks and constitute the credit- scoring model for some consumer credit types such as home loans, car loans, and individual support loans.
More specifically, this study aims to examine the relationship between the consumer credit clients’ payment performance and some demographic variables (such as marital status, sex, age, residential status, occupation) and some financial variables (such as income, loan size, interest rate, maturity, credit category).
The present paper is important for three reasons. First, many previous studies and financial institutions have focused on the relationship between lenders’ decision and the characteristics of the consumer credit applicants rather than the relationship between payment performance of the consumer credit clients and their characteristics. It is, of course, important to get some information about the relationship between characteristics of people apply for consumer credit (applicants) and to whom the credit will be given. However, it is equally beneficial to have an idea about the relationship between the characteristics of people that are already accepted (clients) and whether they are paying back their loans on time or not i.e. payment performance. To some extent, the second is kind of testing whether the decision of accepting/rejecting (or the decision criteria) the applicants is the right one or not.
Therefore, investigating the effects of some characteristics of credit clients on clients’ payment performance becomes crucial. Second, by ranking customers according to predicted default probabilities, a bank will have a chance to minimize the expected default or misclassification rate subject to some exogenous acceptance rule (Carling et al., 1998). As a reaction to an increasing competition and bankruptcies, banks all over the world are trying hard to improve the process of loan origination in corporate banking. Practitioners estimate that improvements in risk management can decrease credit losses by 20 to 40%. Third, no research has been done on characteristics consumer credit applicants and/or clients of any Turkish financial institution in order to develop credit-scoring criteria for the banking sector in.
For the purpose of our study, we gathered the data on the characteristics of the credit clients of one of the biggest banks in Turkey. Decreasing the credit default risk is especially important for developing countries, since their financial environment is unstable. Turkish financial system is not only very unstable but also recognizes the concept of credit in late 1988 in real sense. Thus, consumer credit is a new concept for Turkish financial market. In addition to insufficient credit granting mechanism, competition in Turkish credit market forces banks and financial institutions to make credit-granting decision really fast, usually in a day. Therefore, credit-scoring systems are trying to be adapted to Turkish banks and financial institutions that have been used in many developed countries since the 1980s. As a result of improvements in credit risk management, during the last decade, credit default rate decreased from 6% to 1.24%, whereas balance of consumer credit increased from TL 595.7 trillion to TL 3,678.9 trillion.
The following section gives a brief review of related research, then, the conceptual model used in this study followed by explanations on data, methodology, and statistical analysis used are presented. Finally, in the last section, conclusions and suggestions for further research are discussed.
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