Analyzing Loan Default Rise for FinCred
Budget: £20 – £250 GBP
FinCred Ltd., a UK-based online lending platform, has recently launched a new service offering unsecured personal loans to costumers. Despite an initial surge in loan applications, the default rate has risen sharply over the past six months. The management suspects that this increase is due to principal-agent problems between FinCred Ltd. (the principal) and its borrowers (the agents).
Scenario Details:
• FinCred Ltd. sets loan terms based on borrowers' credit scores and financial histories.
• Borrowers receive funds with minimal oversight on how the money is utilized.
• The platform offers incentives for quick loan approvals to attract more customers.
• There is limited monitoring of borrowers' post-loan behaviour and financial health.
Task: Analyze the principal-agent problems evident in FinCred Ltd.’s new personal loan service. Specifically, address the issues of information asymmetry and moral hazard between the platform and borrowers. Using relevant models, evaluate the impact of these problems on the default rates and on the profile of costumers that receive the loan. Propose specific managerial strategies that FinCred Ltd. can implement to mitigate these principal-agent issues and reduce default rates effectively.
Scenario Details:
• FinCred Ltd. sets loan terms based on borrowers' credit scores and financial histories.
• Borrowers receive funds with minimal oversight on how the money is utilized.
• The platform offers incentives for quick loan approvals to attract more customers.
• There is limited monitoring of borrowers' post-loan behaviour and financial health.
Task: Analyze the principal-agent problems evident in FinCred Ltd.’s new personal loan service. Specifically, address the issues of information asymmetry and moral hazard between the platform and borrowers. Using relevant models, evaluate the impact of these problems on the default rates and on the profile of costumers that receive the loan. Propose specific managerial strategies that FinCred Ltd. can implement to mitigate these principal-agent issues and reduce default rates effectively.