Setting an optimal loan performance window and a bad loan definition for the credit risk assessment model for credit unions in Lithuania

LTReikšminiai žodžiai: Kredito rizika; Kredito unijos; Paskolos; Credit risk; Credit unions; Loan performance window; Bad loan definition.

ENThe aim of the research is to provide suitable methods for the setting of an appropriate defi nition of a bad loan and an optimal loan performance window for the statistical credit risk prediction models in credit unions. The article uses the following methods: survey, modelling, statistical analysis and evaluation of corporate loan data. In the scientifi c literature, expert methods are usually applied in the analysis of the issues of credit risk model construction. However, the expert approach does not refl ect the external environment, therefore, such methods cannot ensure high accuracy and can lead to signifi cant losses for credit providers. For this reason, the authors have taken a different approach. Firstly, seeking to investigate business needs, expectations and risk tolerance of credit unions, a survey of these market players was conducted. The authors of this article surveyed 56 of existing 74 credit unions in Lithuania. Secondly, the Markov chain method for bad loan defi nition and ever delinquency curves, based on a cohort analysis for defi nition of optimal loan performance window were applied to a corporate loan data set from the credit union sector. The survey has shown that credit unions are inhomogeneous in terms of tolerance of credit risk; most credit unions specifi ed 90 days past due as a major bad loan indicator. However, a quantitative analysis shows that loans that reached 30 or 60 days past due in the first year, are characterised by a high probability of migrating to a worse state. In order to meet business needs of credit unions, we set 60 days past due as a major bad loan defi nition criterion and 25 months as an optimal loan performance window. The research results will contribute to the development of a state-of-the-art credit risk assessment and pricing model, suitable for use by credit unions having regard to the challenging modern financial market. [From the publication]