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I am doing credit risk modelling on costumer transaction data a part of which looks like this : 

str(x)
'data.frame':   412516 obs. of  26 variables:
 $ Tenure           : num  1.26 1.25 1.26 1.31 1.32 ...
 $ Product          : Factor w/ 24 levels "BACKHOE LOADER",..: 4 4 4 9 9 9 9 9 9 9 ...
 $ Net.Exposure     : num  333339 528049 327335 350000 460000 ...
 $ OD.On.31.01.2017 : num  0 90386 0 0 1099692 ...
 $ LM.Bucket        : Ord.factor w/ 11 levels "0"<"1 TO  30"<..: 1 1 1 1 11 11 11 11 11 11 ...
 $ Bucket           : Ord.factor w/ 11 levels "0"<"1 TO  30"<..: 1 3 1 1 11 11 11 11 11 11 ...
 $ Billing          : num  65380 0 8800 6339 8331 ...
 $ Fin.IRR          : num  13.5 14.6 14.6 18.1 23.3 ...
 $ NPA.Flag         : Factor w/ 2 levels "No","Yes": 1 1 1 1 2 2 2 2 2 2 ...
 $ Inst.Due         : num  0 0.85 0 0 3 3 3 3 3 3 ...
 $ FR.On.31.01.2017 : num  65380 0 38940 35043 499860 ...
 $ POS.On.31.01.2017: num  56453 0 32920 33368 293943 ...
 $ Del.String       : int  2 1 1 1 53720 53720 53720 53720 53720 53720 ...
 $ Territory        : Factor w/ 43 levels "AGRA","AHMEDABAD",..: 41 41 41 41 41 41 41 41 41 41 ...

The variables like OD(Overdue) and LM.Bucket( How many months he has been due on his loan payment till last month) change every month .I have 2 tasks :Predict Bucket and NPA Flag(Non performing asset)

I built a model for this based only on the Jan data(x). But my question is since these variables change every month, should i treat this as a sequential data and build a deep learning model(HMM/NN) on it? If i should what should I do with the static variables like Product type etc.?

I asked my boss regarding the same and he said it shouldn't be done because external economy factor change with time. Is that a reason for concern?

Grasshopper
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Dhruv Mahajan
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2 Answers2

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This basically asks for a recurrent network, like the LSTM. But if you only have 2 properties that are dynamic, I don't think you will have as much luck because they might be affected from external factors as your boss said. However, this will happen regardless of the model you're using.

You should not throw away static properties, unless they are the same for every test case. E.g. farmer/politician/baker category should always be included, but you call this 'static' but it's not completely static as it is not the same for every sample in your test cases.

Thomas Wagenaar
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  • Thanks for the answer. Actually I have a few more properties that are dynamic, I only mentioned 2(Total I have 9) The variables like product type, costumer category etc. wont change throughout my data because once the costumer has taken the loan, it wont change, only his transaction data will change. But If i make a dynamic model would I have to throw these away? Because these are really important variable, a costumer category(farmer or politician) would have a huge impact on whether he will default the loan payments. – Dhruv Mahajan May 18 '17 at 09:42
  • So that's why I asked whether I should make a standard classification model using only single month data, it should capture the static variable but not the dynamic variables well – Dhruv Mahajan May 18 '17 at 09:43
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The objective with supervised learning is to try to create a model of your data that helps you predict future values. You do that by selecting features on your data set - what you call variables - that you believe represent well the problem.

I'm no expert but I understand economy is affected by an enormous number of variables, so even if you create a model that fits the data you currently have based on some of those variables, it might become obsolete the moment variables you did not consider start affecting the end result. That's what I believe your boss was talking about.

Now, if you do decide to train a neural network in order to predict Bucket and NPA your first step will be to choose which variables you'll consider in your model. Keeping the 'static' variables will likely make your network have different predictions for, for example, different Product types but that depends on how the data is distributed across this static variables. If you choose to not use the static variables your model will completely ignore them when making predictions, which might not be what you want.

Grasshopper
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  • Hi, I appreciate the answer but my question was something different, I am trying to ask if I should build a static model that is classify the NPA based only on a single month data, I did it using standard classification algos like xgboost and random forest, but as I said the thing is some of these variables change with time and some don't. So basically overdue will be different in February data but the product type will be same for that costumer. So my second model option would be to take such monthly data let's say from 2010, and build a NN/HMM on it because I can't build xgboost etc on it – Dhruv Mahajan May 18 '17 at 09:15
  • So which of these 2 models should I prefer? Also if I prefer 2nd model I will have some features that don't change with time, what should I do about those? – Dhruv Mahajan May 18 '17 at 09:16