ISSN (Print) : 2319-8613

ISSN (Online) : 0975-4024 Sudhamathy G / International Journal of Engineering and Technology (IJET)

Credit Risk Analysis and Prediction

Modelling of Bank Loans Using R
Sudhamathy G. #1
#1
Department of Computer Science, Avinashilingam Institute for Home Science and Higher Education for
Women University, Coimbatore – 641 043, India.
1
[email protected]
Abstract—Nowadays there are many risks related to bank loans, especially for the banks so as to reduce
their capital loss. The analysis of risks and assessment of default becomes crucial thereafter. Banks hold
huge volumes of customer behaviour related data from which they are unable to arrive at a judgement if
an applicant can be defaulter or not. Data Mining is a promising area of data analysis which aims to
extract useful knowledge from tremendous amount of complex data sets. In this paper we aim to design a
model and prototype the same using a data set available in the UCI repository. The model is a decision
tree based classification model that uses the functions available in the R Package. Prior to building the
model, the dataset is pre-processed, reduced and made ready to provide efficient predictions. The final
model is used for prediction with the test dataset and the experimental results prove the efficiency of the
built model.
Keyword-Credit Risk, Data Mining, Decision Tree, Prediction, R
I. INTRODUCTION
Credit Risk assessment is a crucial issue faced by Banks nowadays which helps them to evaluate if a loan
applicant can be a defaulter at a later stage so that they can go ahead and grant the loan or not. This helps the
banks to minimize the possible losses and can increase the volume of credits. The result of this credit risk
assessment will be the prediction of Probability of Default (PD) of an applicant. Hence, it becomes important to
build a model that will consider the various aspects of the applicant and produces an assessment of the
Probability of Default of the applicant. This parameter PD, help the bank to make decision if they can offer the
loan to the applicant or not. In such scenario the data being analysed is huge and complex and using data mining
techniques to obtain the result is the most suitable option provided its efficient analytical methodology that finds
useful knowledge. There are many such work has been done previously, but they have not explored the use of
the features available in R package. R Package is an excellent statistical and data mining tool that can handle
any volume of structured as well as unstructured data and provide the results in a fast manner and presents the
results in both text and graphical manners. This enables the decision maker to make better predictions and
analysis of the findings. The aim of this work is to propose a data mining framework using R for predicting PD
for the new loan applicants of a Bank. The data used for analysis contains many inconsistencies like missing
values, outliers and inconsistencies and they have to be handled before being used to build the model. Only few
of the customer parameters really contribute to the prediction of the defaulter. So, those parameters or features
need to be identified before a model is applied. To classify if the applicant is a defaulter or not, the best data
mining approach is the classification modelling using Decision Tree. The above said steps are integrated into a
single model and prediction is done based on this model. Similar works have been discussed in the “Related
Work” Section and the gap in exploring using R has been highlighted. The “Methodology” Section explores the
approach that has been followed using text as well as block diagrams. The “Results and Discussions” Section
explores the coding and the resultant model applied in this work. It is also important to note that the metrics
derived out of this model proves the high accuracy and efficiency of the built model.
II. RELATED WORK
In [1] the author introduces an effective prediction model for predicting the credible customers who have
applied for bank loan. Decision Tree is applied to predict the attributes relevant for credibility. This prototype
model can be used to sanction the loan request of the customers or not. The model proposed in [2] has been built
using data from banking sector to predict the status of loans. This model uses three classification algorithms
namely j48, bayesNet and naiveBayes. The model is implemented and verified using Weka. The best algorithm
j48 was selected based on accuracy. An improved Risk prediction clustering Algorithm that is Multi-
dimensional is implemented in [3] to determine bad loan applicants. In this work, the Primary and Secondary
Levels of Risk assessments are used and to avoid redundancy, Association Rule is integrated. The proposed
method predicts with better accuracy and consumes less time than previous methods.
In [4] a decision tree model was used as a classifier and for feature selection genetic algorithm is used. The
model was tested using Weka. The work in [5] proposes two credit scoring models using data mining techniques
to support loan decisions for the Jordanian commercial banks. Considering the rate of accuracy, the results

DOI: 10.21817/ijet/2016/v8i5/160805414 Vol 8 No 5 Oct-Nov 2016 1954

ISSN (Print) : 2319-8613
ISSN (Online) : 0975-4024 Sudhamathy G / International Journal of Engineering and Technology (IJET)

indicate that the logistic regression model performed better than the radial basis function model. The work in [6]
builds several non-parametric credit scoring models. These are based on the multilayer perceptron approach.
The work benchmarks their performance against other models which applies the traditional linear discriminant
analysis, logistic regression and quadratic discriminant analysis techniques. The results show that the neural
network model outperforms the other three techniques.
The work in [7] compares support vector machine based credit-scoring models that were built using Broad and
Narrow default definitions. It was shown that models built from Broad definition default can outperform models
developed from Narrow default definition. Bank loan default risk analysis, Type of scoring and different data
mining techniques like Decision Tree, Random forest, Boosting, Bayes classification, Bagging algorithm and
other techniques used in financial data analysis were studied in [8]. The aim of the study in [10] is to introduce a
discrete survival model to study the risk of default and to provide the experimental evidence using the Italian
banking system. The work in [11] checks the applicability of the integrated model on a sample dataset taken
from Banks in India. The model is a combination based on the techniques of Logistic Regression, Radial Basis
Neural Network, Multilayer Perceptron Model, Decision tree and Support Vector Machine. It also compares the
effectiveness of these techniques for credit Scoring.
The purpose of the work in [12] is to estimate the Label of Credit customers via Fuzzy Expert System. The class
of customers has been found by the Fuzzy Expert System and then by the Data Mining Algorithms. This is
done using the Clementine software. The work in [14] explores the predicted behaviour of five classifiers in
terms of credit risk prediction accuracy, and how such accuracy could be improved. The results of the credit
datasets are compared with the performance of each individual classifier based on accuracy. The work in [15]
proposed ensemble classifier is constructed by incorporating several data mining techniques, that involves
optimal associate binning, discretize continuous values, neural network, support vector machine, and Bayesian
network are used. The data driven nature of the proposed system distinguishes it from existing credit scoring
systems. A novel credit scoring model is proposed in [16] that gets an aggregation of classifiers. The vertical
bagging decision trees model, has been tested using the credit databases in the UCI Machine Learning
Repository. The analysis results show the performance is outstanding based on accuracy.
III. METHODOLOGY
Credit risk evaluation has become more important nowadays for Banks to issue loans for their customers based
on their credibility. For this the internal rating based approach is the most sought by the banks that need
approval by the bank manager. The most accurate and highly used credit scoring measure is the Probability of
Default called the PD. Defaulter is the one who is unlikely to repay the loan amount or will have overdue of
loan payment by more than 90 days. Hence determining the PD is the crucial step for credit scoring of the
customers seeking bank loan.
Hence in this paper we present a data mining framework for PD estimation from a given set of data using the
data mining techniques available in R Package. The data used to implement and test this model is taken from the
UCI Repository. The German credit scoring dataset with 1000 records and 21 attributes is used for this purpose.
The numeric format of the data is loaded into the R Software and a set of data preparation steps are executed
before the same is used to build the classification model. The dataset that we have selected does not have any
missing data. But, in real time there is possibility that the dataset has many missing or imputed data which needs
to be replaced with valid data generated by making use of the available complete data. The k nearest neighbours
algorithm is used for this purpose to perform multiple imputation. This is implemented using the knnImputation()
function of package DMwR. The numeric features are normalized before this step.
The dataset has many attributes that define the credibility of the customers seeking for several types of loan. The
values for these attributes can have outliers that do not fit into the regular range of data. Hence, it is required to
remove the outliers before the dataset is used for further modelling. The outlier detection for quantitative
features is done using the function levels(). For numeric features the boxplot technique is used for outlier
detection and this is implemented using the daisy() function of the cluster package. But, before this the numeric
data has to be normalized into a domain of [0, 1]. The agglomerative hierarchical clustering algorithm is used
for outlier ranking. This is done using the outliers.ranking() function of the DMwR package. After ranking the
outlier data, the ones that is out of range is disregarded and the remaining outliers are filled with null values.
The inconsistencies in the data like unbalanced dataset have to be balanced before building the classification
model. Many real time datasets have this problem and hence need to be rectified for better results. But, before
this step, it is required to split the sample dataset into training and test datasets which will be in the ratio 4:1 (i.e.
Training dataset 80% of data and 20% of data will be test dataset). Now the balancing step will be executed on
the training dataset using the SMOTE() function of the DMwR package.
Next using the training dataset the correlation between the various attributes need to be checked to see if there
are any redundant information represented using two attributes. This is implemented using the plotcorr()
function the ellipse package. The unique features will then be ranked and based on some threshold limit the

DOI: 10.21817/ijet/2016/v8i5/160805414 Vol 8 No 5 Oct-Nov 2016 1955

ISSN (Print) : 2319-8613
ISSN (Online) : 0975-4024 Sudhamathy G / International Journal of Engineering and Technology (IJET)

number of highly ranked features will be chosen for model building. For ranking the features the randomForest()
function of the randomForest package is used. The threshold for selecting the number of important features is
chosen by using the rfcv() function of the randomForest package.
Now the resultant dataset with the reduced number of features is ready for use by the classification algorithms.
Classification is one of the data analysis methods that predict the class labels [19]. Classification can be done in
several ways and one of the most appropriate for the chosen problem is using decision trees. Classification is
done in two steps – (i) the class labels of the training dataset is used to build the decision tree model and (ii)
This model will be applied on the test dataset to predict the class labels of the test dataset. For the first step the
function rpart() of the rpart package will be used. The predict() function is used to execute the second step. The
resultant prediction is then evaluated against the original class labels of the test dataset to find the accuracy of
the model.
The steps involved in this model building methodology are represented as below and the same are presented as
block diagrams in Fig. 1, Fig. 2, Fig. 3 and Fig. 4.

Step 1 – Data Selection

Step 2 – Data Pre-Processing
Step 2.1 – Outlier Detection
Step 2.2 – Outlier Ranking
Step 2.3 – Outlier Removal
Step 2.4 – Imputations Removal
Step 2.5 – Splitting Training & Test Datasets
Step 2.6 – Balancing Training Dataset
Step 3 – Features Selection
Step 3.1 – Correlation Analysis of Features
Step 3.2 – Ranking Features
Step 3.3 – Feature Selection
Step 4 – Building Classification Model
Step 5 – Predicting Class Labels of Test Dataset
Step 6 – Evaluating Predictions

Fig. 1. Major Steps of the Credit Risk Analysis and Prediction Modelling Using R

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 ISSN (Print) : 2319-8613
ISSN (Online) : 0975-4024 Sudhamathy G / International Journal of Engineering and Technology (IJET)

Fig. 2. Sub Steps under the Pre-Processing Step

Fig. 3. Sub Steps under the Dataset Selection Process

Fig. 4. Sub Steps under the Feature Selection Step

IV. RESULTS AND DISCUSSIONS

A. Dataset Selection
The German Credit Scoring dataset in the numeric format which is used for the implementation of this model
has the below attributes and the descriptions of the same are given in the below Table I.

TABLE I Dataset Attribute Types

A1 A2 A3 A4 A5 A6 A7 A8 A9 A10 A11 A12 A13 A14 A15 A16 A17 A18 A19 A20 Def
Q N Q Q N Q Q N Q Q N Q N Q Q N Q N B B B

Q: Quantitative N: Numeric B: Binary

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A1: Status of Existing Account

(1: < 0 DM, 2: < 200 DM, 3: >= 200 DM, 4: No existing Account)
A2: Loan Duration in Month
A3: Credit History
(0: No credits taken so far, 1: All credit in this Bank paid back duly,
2: Existing credits paid back dully till now,
3: Delay in paying off in the past,
4: Credits existing in other banks)
A4: Loan Purpose
(0: new car purchase, 1: used car purchase,
2: furniture or equipment purchase, 3: radio or television purchase,
4: domestic appliances purchase,
5: repairs, 6: education, 7: vacation, 8: retraining,
9: Business, 10: others)
A5: Credit Amount (in DM)
A6: Bonds / Savings
(1: < 100 DM, 2: >= 100 and < 500 DM, 3: >= 500 DM and 1000 DM,
4: >= 1000 DM, 5: no savings / bonds)
A7: Present Employment Since
(1: unemployed, 2: < 1 year, 3: >= 1 and < 4 years,
4: >= 4 and < 7 years, 5: >= 7 years)
A8: Instalment rate in percentage of disposable income
A9: Personal Status and Sex
(1: Divorced Male, 2: Divorced/Married Female, 3: Male Single,
4: Married Male, 5: Female Single)
A10: Other Debtors / Guarantors
(1: None, 2: Co-applicant, 3; Guarantor)

A11: Present Residence Since (in Years)

A12: Property
(1: Real Estate, 2: Life Insurance, 3: Car or others, 4: No property)
A13: Age in years
A14: Other instalment plans
(1: Bank, 2: Stores, 3: None)
A15: Housing
(1: Rented, 2: Owned, 3: For Free)
A16: Number of existing credits at this bank
A17: Job Status
(1: Unemployed non-resident, 2: Unemployed resident,
3: Skilled Employee, 4: Self-Employed )
A18: Number of People being liable to provide maintenance for
A19: Telephone
(0: Not Available, 1: Available)
A20: Foreign Worker
(0: No, 1: Yes)
Def: Class Label
(0: Non Default, 1: Default)

After selecting and understanding the dataset it is loaded into the R software using the below code. The dataset
is loaded into R with the name creditdata.
creditdata <- read.csv("UCI German Credit Data Numeric.csv", header = TRUE, sep = ",")
nrow(creditdata)
[1] 1000

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ISSN (Print) : 2319-8613
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B. Data Pre-Processing
1) Outlier Detection: To identify the outliers of the numeric attributes, the values of the values of the numeric
attributes are normalized into the domain range of [0, 1] and they are plotted as boxplot to view the outlier
values. The code and the result for this step are given as below.
normalization <- function(data,x)
{for(j in x)
{data[!(is.na(data[,j])),j]=
(data[!(is.na(data[,j])),j]-min(data[!(is.na(data[,j])),j]))/
(max(data[!(is.na(data[,j])),j])-min(data[!(is.na(data[,j])),j]))}
return(data)}

Fig. 5. Box Plot of Outliers in Numeric Attributes

c <- c(2,5,8,11,13,16,18)
normdata <- normalization(creditdata,c)
boxplot(normdata[,c])
To identify the outliers of the quantitative attributes, the below commands are used. From the results of the same,
one can identify the values that do not fall under the allowed values. For example the attribute “A1” can only
take the values “1”, “2”, “3”, “4”. If there is any observation that has data other than these allowed values, it is
removed. Similarly, the allowed values for each quantitative attribute can be checked and outliers removed.
levels(as.factor(creditdata[,"A1"]))
[1] "1" "2" "3" "4"

2) Outliers Ranking: The agglomerative hierarchical clustering algorithm chosen for ranking the outliers is less
complex and easy to understand. Each observation is assumed to be a cluster and in each step, the observations
are grouped based on the distance between them. Each observation that is observed later has lower rank. It is
seen that the observations with lower rank are outliers because there are dissimilarities between them and the
other observations [18]. For outlier ranking the following code is used.
require(cluster)
distance=daisy(creditdata[,-19],stand=TRUE,metric=c("gower"), type =
list(interval=c(2,5,8,11,13,16,18), nominal=c(1,3,4,6,7,9,10,12,14,15,17),binary=c(19,20)))
require(DMwR)
outlierdata=outliers.ranking(distance,test.data=NULL,method="sizeDiff",clus = list(dist="euclidean",
alg = "hclust", meth="average"), power = 1, verb = F)

3) Outliers Removal: The observations which are out of range (based on the rankings) are removed using the
below code. After outlier removal the dataset creditdata is renamed as creditdata_noout.
boxplot(outlierdata$prob.outliers[outlierdata$rank.outliers])
n=quantile(outlierdata$rank.outliers)

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n1=n[1]
n4=n[4]
filler=(outlierdata$rank.outlier > n4*1.3)
creditdata_noout=creditdata[!filler,]
nrow(creditdata_noout)
[1] 975

4) Imputations Removal: The method used for null values removal is multiple imputation method in which the
k nearest neighbours’ algorithm is used for both numeric and quantitative attributes. The numeric features are
normalized before calculating the distance between objects. The following code is used for imputations removal.
After imputations removal the dataset creditdata_noout is renamed as creditdata_noout_noimp.
require(DMwR)
creditdata_noout_noimp=knnImputation(creditdata_noout, k = 5, scale = T, meth = "weighAvg",
distData = NULL)
nrow(creditdata_noout_noimp)
[1] 975
There were no null values for the attributes in the dataset we have chosen and hence the number of records
remains unchanged after the above step.

5) Splitting Training and Test Datasets: Before proceeding to the further steps, the dataset has to be split into
training and test datasets so that the model can be built using the training dataset. The code for splitting the
database is listed below.
library(DMwR)
split<-sample(nrow(creditdata_noout_noimp), round(nrow(creditdata_noout_noimp)*0.8))
trainingdata=creditdata_noout_noimp[split,]
testdata=creditdata_noout_noimp[-split,]

6) Balancing Training Dataset: The SMOTE function handles unbalanced classification problems and it
generates the new smoted dataset that addresses the unbalanced class problem. It artificially generates
observations of minority classes using the nearest neighbours of this class of elements to balance the training
dataset [18]. The following code is used for balancing the training dataset.
creditdata_noout_noimp_train=trainingdata
creditdata_noout_noimp_train$default <- factor(ifelse(creditdata_noout_noimp_train$Def == 1, "def",
"nondef"))
creditdata_noout_noimp_train_smot <- SMOTE(default ~ ., creditdata_noout_noimp_train,
k=5,perc.over = 500)
The data distribution before and after balancing the data are shown in the Fig. 6 and Fig. 7 respectively. This
method is based on proximities between objects and produces a spatial representation of these objects.
Proximities represent the similarity or dissimilarity between data objects. The code used to plot these objects is
shown below.
library(cluster)
dist1=daisy(creditdata_noout_noimp_train[,-21],stand=TRUE,metric=c("gower"), type =
list(interval=c(2,5,8,11,13,16,18), nominal=c(1,3,4,6,7,9,10,12,14,15,17),binary=c(19,20)))
dist2=daisy(creditdata_noout_noimp_train_smot[,-21],stand=TRUE,metric=c("gower"), type =
list(interval=c(2,5,8,11,13,16,18), nominal=c(1,3,4,6,7,9,10,12,14,15,17),binary=c(19,20)))
loc1=cmdscale(dist1,k=2)
loc2=cmdscale(dist2,k=2)
x1=loc1[,1]
y1=loc1[,2]
x2=loc2[,1]
y2=loc2[,2]

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ISSN (Print) : 2319-8613
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plot(x1,y1,type="n")
text(x1,y1,labels=creditdata_noout_noimp_train[,22],
col=as.numeric(creditdata_noout_noimp_train[,22])+4)
plot(x2,y2,type="n")
text(x2,y2,labels=creditdata_noout_noimp_train_smot[,22],
col=as.numeric(creditdata_noout_noimp_train_smot[,22])+4)

Fig. 6. Data Distribution before Balancing Fig. 7. Data Distribution after Balancing

C. Features Selection
1) Correlation Analysis: Datasets may contain irrelevant or redundant features which might make the model
more complicated. Hence removing such redundant features will speed up the model. The function plotcorr()
plots a correlation matrix using ellipse shaped glyphs for each entry. It shows the correlation between the
features in an easy way. The plot is coloured for more clarity. The following code displays the correlation.
Correlation is checked independently for each data type: numeric and nominal. From the results in Fig. 8 and
Fig. 9, it is observed that there is no positive correlation between any of the features, both numeric and
quantitative. Hence, in this step none of the features are removed.
library(package="ellipse")
c= c(2,5,8,11,13,16,18)
plotcorr(cor(creditdata_noout_noimp_train[,c]),col=cl<-c(7,6,3))

Fig. 8. Correlation between Numeric Features

c= c(1,3,4,6,7,9,10,12,14,15,17)
plotcorr(cor(creditdata_noout_noimp_train [,c]),col=cl<-c("green","red","blue"))

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ISSN (Print) : 2319-8613
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Fig. 9. Correlation between Quantitative Features

2) Ranking Features: The aim of this step is to find the subset of features that will be really relevant for the
analysis as irrelevant features causes drawbacks like increased runtime, complex patterns etc. This resultant
subset of features should give the same results as that of the original dataset. The proposed method picks a
random object from the observations and generates several trees and on the basis of the accuracy of classifier or
error ratio, features are weighted. To make the table of important features the following code is used.
library(randomForest)
set.seed(454)
data.frame(creditdata_noout_noimp_train)
randf<-randomForest(Def~ ., data=creditdata_noout_noimp_train, ntree=700, importance=TRUE,
proximity=TRUE)
importance(randf, type=1, scale=TRUE)
The above function importance() displays the features importance using the “mean decrease accuracy” measure
in Table II. The measures can be plotted using the function varImpPlot()as shown in Fig. 10.
varImpPlot(randf)

TABLE II Importance of Features

Features Mean Decrease Accuracy

A1 8.085083
A2 7.070556
A3 4.691744
A4 -0.10716
A5 6.238347
A6 4.554283
A7 3.316346
A8 0.59622
A9 1.634721
A10 1.383725
A11 0.541585
A12 2.344433
A13 2.621854
A14 4.629331
A15 0.825801
A16 1.225997
A17 0.635881
A18 0.037408
A19 1.117891
A20 1.388876

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ISSN (Print) : 2319-8613
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Fig. 10. Ranking Features

3) Features Selection: To fix the number of features to be selected based on the ranking, a threshold is required.
This is accomplished using the below code.
findopt=rfcv(creditdata_noout_noimp_train[,-21],
creditdata_noout_noimp_train[,21], cv.fold=10, scale="log", step=0.9)
opt <- which.max(findopt$error.cv)
plot( findopt$n.var, findopt$error.cv, type= "h", main = "Importance", xlab="Number of Features",
ylab = "Classifier Error Rate")
axis(1, opt, paste("Threshold", opt, sep="\n"), col = "red", col.axis = "red")
The result of this code is shown in the Fig. 11 and it shows the best number of features is 15. Hence we select
the features A1, A2, A3, A5, A6, A7, A9, A10, A12, A13, A14, A16, A19, A20, Def to build the model.

D. Building Model
Classification is one of the data analysis forms that predicts categorical labels [19]. We used the decision tree
model to predict the probability of default. The following code uses the function rpart() and finds a model from
the training dataset.
library(rpart)
c = c(4, 8, 11, 15, 17, 18, 22)
trdata=data.frame(creditdata_noout_noimp_train[,-c])
tree=rpart(trdata$Def~.,data=trdata,method="class")
printcp(tree)

Fig. 11. Threshold for Features Selection

The result of this code is displayed below and in Table III:

Classification tree:
rpart(formula = trdata$Def ~ ., data = trdata, method = "class")
Variables actually used in tree construction:
[1] A1 A12 A13 A2 A3 A5 A6 A9
Root node error: 232/780 = 0.29744
n= 780

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ISSN (Print) : 2319-8613
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TABLE III Results of rpart() Function

CP nsplit rel error xerror xstd

1 0.049569 0 1 1 0.05503
2 0.012931 4 0.78448 0.84483 0.052215
3 0.011494 5 0.77155 0.88793 0.053071
4 0.010057 9 0.72414 0.89655 0.053235
5 0.01 18 0.61207 0.89655 0.053235

The command to plot the classification tree is shown below.

plot(tree, uniform=TRUE,main="Classification Tree")
text(tree, use.n=TRUE, all=TRUE, cex=0.7)

Fig. 12. Classification Tree Model

E. Prediction
The model is tested using the test dataset by using the predict() function. The code for the same and the results
of the prediction are displayed below and in Table IV.
predicttest=data.frame(testdata)
pred=predict(tree,predicttest)
c=c(21)
table(predict(tree, testdata, type="class",na.action=na.pass), testdata[, c])

TABLE IV Results of Prediction

def nondef
def 30 5
nondef 6 154

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ISSN (Print) : 2319-8613
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F. Evaluation
Common metrics calculated from the confusion matrix are Precision, Accuracy, TP Rate and FP Rate. The
calculations for the same are listed below.

True Defaults
Precision = _____________________________
True Defaults + False Defaults
True Defaults + True Nondefaults
Accuracy = _______________________________
Total Testset
True Defaults
TP Rate = _______________
Total Defaults
False Defaults
FP Rate = _________________
Total Nondefaults

From our resultant data we get the values of the above metrics by applying the values as derived below.
True Defaults = 30
False Default = 6
Total Default = 35
True Nondefault = 154
False Nondefault = 5
Total Nondefault = 160
Total Testset = 195
Precision = 30 / (30 + 6) = 0.833
Accuracy = (30 + 154) / 195 = 0.943
TP Rate = 30 / 35 = 0.857
FP Rate = 6 / 160 = 0.037

TABLE V Measures from the Confusion Matrix

Precision Accuracy TP Rate FP Rate

0.833 0.943 0.857 0.037
These results show that the proposed model is performing with high accuracy and precision and hence can be
applied for credit scoring.

V. CONCLUSION
In this paper we presented a framework to effectively identify the Probability of Default of a Bank Loan
applicant. Probability of Default estimation can help banks to avoid huge losses. This model is built using the
data mining functions available in the R package and dataset is taken from the UCI repository. As the pre-
processing step is the most important and time consuming one, classification and clustering techniques in R
were used to make the data ready for further use. Pre-processed dataset is then used for building the decision
tree classifier. The tree model is then used to predict the class labels of the new loan applicants, their Probability
of Default. Several R functions and packages were used to prepare the data and to build the classification model.
The work proves that the R package is an efficient visualizing tool that applies data mining techniques. The
metrics derived from the predictions reveal the high accuracy and precision of the built model.

DOI: 10.21817/ijet/2016/v8i5/160805414 Vol 8 No 5 Oct-Nov 2016 1965

ISSN (Print) : 2319-8613
ISSN (Online) : 0975-4024 Sudhamathy G / International Journal of Engineering and Technology (IJET)

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AUTHOR PROFILE
Dr. G. Sudhamathy has obtained an undergraduate degree B.Sc. (Spl) Mathematics from Lady Doak College,
Madurai, India in 1995. She holds a post graduate degree, Master of Computer Applications (MCA) at
Thiagarajar School of Management, Madurai, India in 1998. She has acquired her doctorate degree in Computer
Science from Bharathiar University, Coimbatore, India in 2013. She is currently working as Assistant professor
in the Department of Computer Science in Avinashilingam Institute for Home Science and Higher Education for
Women, Coimbatore, Tamilnadu, India. She has a rich industrial experience of around 11 years working in
various multinational Information Technology companies like Cognizant Technologies Solutions, L&T Infotech,
etc. She has worked with international clients and have worked in London for a year. She also has around 7
years of academic and research experience. Her research interests are in Web Usage Mining and Applications of
Data Mining using R.

DOI: 10.21817/ijet/2016/v8i5/160805414 Vol 8 No 5 Oct-Nov 2016 1966