Credit Risk Assessment: Making Smarter Lending Decisions

Why Credit Risk

Assessment Matters Credit risk assessment is the backbone of any successful financial operation. At Credefi, we recognize how crucial it is to understand the risks involved in lending and borrowing. Drawing on experience from the Traditional Finance (TradFi) sector, we prioritize the accuracy of our credit risk assessment process. It ensures that both lenders and borrowers are making informed decisions, and that everyone involved is safeguarded from unnecessary financial risks. The main goal of Credefi’s credit risk assessment is simple: to evaluate two key factors: Probability of Repayment – How likely is it that the borrower will repay the loan? Risk Premium – How much extra capital is needed to compensate for the risk of non-repayment?

How Do We Assess Risk?

At Credefi, we take a comprehensive approach to evaluating each borrower and loan request. We use two types of data to create an accurate risk profile:

1. Qualitative Data This includes information gathered through due diligence processes like Know Your Customer (KYC), Know Your Business (KYB), and Webscore evaluations. Here’s what we look at: Company Background: Where is the company registered, and what is its business focus? Industry and Market Context: What industry is the borrower in? How do they compare to competitors and peers?

2. Quantitative Data This is the hard data—the numbers that paint a clear picture of the borrower’s financial health. We analyze historical data, financial statements, and other performance indicators to make predictions about the borrower’s future behavior. Specifically, we use two scorecards, provided by Experian, to assess: Application Scorecard: Analyzes the borrower’s financial details (turnover, profit/loss statements, etc.) during their loan application. Behavioral Scorecard: Looks at how the borrower has performed in the past. Do they pay on time? Have their financials improved? This helps us understand their behavior over time. Credefi’s risk model uses these insights, combined with artificial intelligence (AI), to predict the likelihood of repayment and adjust the risk premium accordingly.

Types of Scorecards We Use

1. Application Scorecard When a borrower applies for a loan, they provide detailed financial data, such as their revenue and profit/loss statements. This data is inputted into our Application Scorecard, which evaluates the borrower’s overall financial health. The platform then estimates whether the loan should be approved based on the borrower's score and performance compared to similar businesses.

2. Behavioral Scorecard The Behavioral Scorecard is used to monitor borrowers who are already in the system, whether it’s for new or returning loans. We track their repayment history and financial performance over time. A borrower who consistently repays on time and shows improvement in their financials may enjoy a lower risk premium or even qualify for loans without collateral in the future. This ongoing tracking means that we can adapt and offer better loan conditions for borrowers who prove themselves to be reliable.

AI-Driven Decision Making Our AI-driven decision engine continually learns from new data, making it more accurate with every transaction. By continuously refining our risk models, Credefi ensures that each loan is assessed with the most up-to-date information available, enabling us to offer both lenders and borrowers a safe and efficient platform.

Summary: How We Protect Lenders and Empower Borrowers Lenders can feel confident knowing that each loan is rigorously assessed for risk, offering greater security and a more predictable return on investment. Borrowers who demonstrate responsible financial behavior and meet our credit criteria can enjoy more favorable loan conditions, including the potential for unsecured loans or reduced collateral requirements. At Credefi, our goal is to make lending and borrowing easier, safer, and more transparent—while helping to foster growth and stability in the real economy.