Artificial intelligence and loan default: The case of commercial banks in India

Abstract

The supervised machine learning algorithm‐based logistic regression predicts the loan default risk by correctly identifying banks with risky/safer loans in the Indian commercial banking sector. Higher levels of interest income and spread have been found negatively associated with the probability of loan default risk, while interest expended, operating expenses and credit deposit ratio are positively related to the level of loan risk. The study recommends that a high spread, low rate of interest expended and lower operating expenses, will effectively lower the probability of loan default risk in the Indian banking sector.