The Study On The Risk-based Pricing Of Internet Financial Lending Using RAROC Methodology

Internet financial lending,which is the combination of Internet and traditional borrowing,has become a new mode of funds accommodation.It has not only broadened the channels of the funds flow to promote the optimal allocation of resources,but also has became a new powerful impetus to China’s financial development,with the drive that the economic development influenced on the transformation of the traditional industry under the New Normal.However,problems,such as the high risk of the borrower’s credit,are restricting the development of the Internet loan industry.How to maximize the return of the investors in the case of effectively controlling the loan risk becomes the key to the sustainable development of the network loan platform.At present,though the fixed-rate pricing model adopted by the network loan platform has a high operability,it can not accurately measure the risk.It will be of great importance to optimize the network loan pricing mechanism by establishing the pricing model which can accurately measure the default loan risk.In this paper,with personal credit characteristic data of borrowers having been acquired from a network loan platform,we evaluated the probability of default and the credit rating of each borrower using logistic regression and scoring card,and based on this,we introduced the supervisory indicators of the Basel II to construct the model of RAROC.According to the matching principle of risk and profit,this paper studies the net loan pricing under the platform pricing model from four aspects:operating cost,capital cost,expected loss and economic capital.The results show that the 18 variables,such as age and education background,will have an impact on whether the borrower would break the contract.and the six of them,AGE,EDU,DTI,ILC₁M,PUL,IGC₂Y,have a greater impact on it.The influence of the four credit variables,i.e.ILC₁M,ICC₁M,IMC₂Y and IGC₂Y on the probability rate of breaking the contract shows that,the network loan platform should pay more attention to the role of credit reporting in the risk assessment;Logistic risk assessment model owns better distinguishing capacity and a higher prediction accuracy as a 1 to 3 probability of default according to borrower,the credit score of score card obtained through linear transformation have obvious difference between borrowers in default and in non default,which can divide quality rating better;The RAROC model which based on the New Basel Accord was proved to be more flexible and risk-sensitive for the pricing of Internet financial lending compared with that of fixed interest rate,which serves as the most widely used pricing strategy for Internet financial lending,It can improve the quality of price-making.