An Improved Credit Scoring Function for the St. Paul Bank for Cooperatives

A new credit scoring function for classifying Bank of Cooperatives loans, pricing loans based on credit risk, screening loan applications, and diagnosing credit weaknesses was estimated using stepwise logistic regression analysis. Two versions were estimated, dichotomous and polychotomous. The dichotomous model is judged superior for the above uses. The model was tested for validity for different types of cooperatives. In a combined estimating and test sample of 708 cooperatives, the model correctly classifies 92 percent of cooperatives in a 2-class system and 70 percent in a 4-class system.