Case: Credit Cards

A nationalized bank has been in the credit card business for the last 16 years. During the past 24
months their repayment default has shot up considerably. Currently around 50% of existing
cardholders have been observed to have defaulted during this period. Even though the bank
charges a penal interest on all delayed payments, such a high default rate is putting a lot of
pressure on the bank’s recovery mechanism and has now begun to impact the profitability of this
division. The problem appears to lie in the screening mechanism used by the bank to evaluate
credit card applicants at the point of card allotment. Therefore the bank desires to revamp its
screening mechanism.

For this purpose, they have conducted a suitable research. Initially a preliminary
research was conducted and the parameters that have a significant influence on Payment Default
were identified. These were:

a) Card Applicant’s Age

b) Monthly Household Income
c) Number of years married
Historical data was collected on the above variables from the bank’s own records for the past 2
years and existing card holders were categorized into 2 groups as below:
a) High Risk (Code = 1)
b) Low Risk (Code = 2)

This was done based on the bank’s experience during the past 24 months. A data extract of this
research is provided in the data file for your analysis.

Case Questions

Q.1. Build a discriminant model to categorize existing card holders into High Risk and Low Risk
categories.

Q.2. State the classification accuracy of this discriminant model.

Q.3. Determine whether the groups created by this discriminant function are distinctly different
statistically.

Q.4.Which predictor variable is the best discriminator for payment default?

Q.5. Identify a discriminant criterion which would enable the bank to classify future card
applicants into High Risk and Low Risk categories based on their discriminant scores.

Justify your answers.

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