Consumer Loan Credit Scoring Model for Pakistani Commercial Banks: An Application of Discriminant Analysis

During last few years, banks in Pakistan have suffered huge losses due to high defunct ratein portfolio of consumer loans. The main reason for defaults was inadequate mechanism andprocedures for sanctioning new loans. In view of increasing infected portfolio of banks in Pakistan,have realized the importance of ascertaining creditworthiness of new consumer loans.In order to decrease the infected portfolio, a credit scoring model has been developed in thisstudy. Discriminant Statistical Technique has been used for developing this credit scoring model.Type 1 and Type 2 error have been worked out to improve the model predicting capabilities.Keywords: Consumer Loans, Credit Worthiness, Delinquency, Discriminant Statistical Technique