Identification of a standard AI based technique for credit risk analysis

Abstract

Purpose

Credit risk assessment has gained importance in recent years due to global financial crisis and credit crunch. Financial institutions therefore seek the support of credit rating agencies to predict the ability of creditors to meet financial persuasions. The purpose of this paper is to construct neural network (NN) and fuzzy support vector machine (FSVM) classifiers to discriminate good creditors from bad ones and identify a best classifier for credit risk assessment.

Design/methodology/approach

This study uses artificial neural network, the most popular AI technique used in the field of financial applications for classification and prediction and the new machine learning classification algorithm, FSVM to differentiate good creditors from bad. As membership value on data points influence the classification problem, this paper presents the new FSVM model. The instances membership is computed using fuzzy c-means by evolving a new membership. The FSVM model is also tested on different kernels and compared and the classifier with highest classification accuracy for a kernel is identified.

Findings

The paper identifies a standard AI model by comparing the performances of the NN model and FSVM model for a credit risk data set. This work proves that that FSVM model performs better than back propagation-neural network.

Practical implications

The proposed model can be used by financial institutions to accurately assess the credit risk pattern of customers and make better decisions.

Originality/value

This paper has developed a new membership for data points and has proposed a new FCM-based FSVM model for more accurate predictions.

Citation

Punniyamoorthy, M. and Sridevi, P. (2016), "Identification of a standard AI based technique for credit risk analysis", Benchmarking: An International Journal, Vol. 23 No. 5, pp. 1381-1390. https://doi.org/10.1108/BIJ-09-2014-0094