Credit Risk

Amukha’s Study Proves Alternative Data Score as Lead Indicator for Financials

In the post-COVID world, the need to protect the bank’s asset quality has grown manifold due to an expected rise in bad loans. To avoid deterioration in the loan book quality, the banks need to strengthen their credit risk models. The focus on traditional datasets alone will not help to capture the complexity and pace of the current economic environment. The banks should integrate alternative datasets on top of traditional financial and internal data to get a complete view of the loan portfolio.

Amukha has introduced an alternative data score to track events from news, provident fund, promoter ownership, and pledging, directors, GST filings, credit ratings, charges, and stock price in real-time. To test whether this score can act as a leading indicator, we conducted a back-testing on the 3-years of data for 200 listed companies.

Our back-testing result showed a positive lead-lag correlation between alternative data score (leading) and financial risk score (lagging) by two-quarters for 76% of companies. In other words, the alternative data indicator can predict the movement in financial risk score two-quarters ahead. On the other hand, the 2-quarter lead-lag correlation for the remaining 24% of companies was negative as the alternative data indicator reflected in their financial risk score with a delay of 3-4 quarters.

Ahluwalia Contracts India is one such company having near-perfect lead-lag correction (0.9) between alternative data score and financial risk score. Ahluwalia Contracts witnessed a steep drop in the financial risk score from a high of 96.7 in the Mar’18 quarter to negative 23 in the current quarter. The alternative data score has correctly predicted the impending drop in the financial risk score two quarters ahead. The negative score for provident fund, directors, charges, GST, news, and stock price led to a downtrend in Ahluwalia Contracts’ alternative data score.

By combining more than ten alternative datasets with traditional data, Amukha has turned Risk Analytics System (RAS) into a comprehensive early warning application. RAS offers a 360-degree view on the bank’s loan portfolio for identifying distressed borrowers ahead of time.

To know more about Amukha’s RAS, email us at info@amukha.com.

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