Credit Risk Rating Using State Machines and Machine Learning

Abstract

Credit risk is the possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations. With the growing number of customers and expansion of businesses, it’s not possible or at least feasible for banks to assess each customer individually in order to minimize this risk. Machine learning can leverage available user data to model a behaviour and automatically estimate a credit score for each customer. In this research, we propose a novel approach based on state machines to model this problem into a classical supervised machine learning task. The proposed state machine is used to convert historical user data to a credit score which generates a data-set for training supervised models. We have explored several classification models in our experiments and illustrated the effectiveness of our modeling approach.