Redefining Lending: Harnessing Financial Engineering in the Modern Era

Abstract

Financial engineering is the application of mathematical and computational techniques related to financial instruments in resolving complex problems. This involves developing new financial instruments and creating innovative risk management strategies. The components of financial engineering include mathematical modeling, complex statistical analysis, and advanced computing tools (Hull, 2015). The traditional lending models have relied heavily on credit scoring systems such as CIBIL, Equifax, and Experian (in Indian Context) that use historical data to assess borrowers’ creditworthiness. These models consider credit history, income levels, employment status, and debt-income ratios. However, these methods have limitations like limited data usage and non-real-time analysis on subjectivity grounds (Thomas et al., 2002).