The influence of sentiment analysis in enhancing early warning system model for credit risk mitigation

Abstract

One important source of bank income is interest income from credit activities, another part of which is obtained from fee-based income. Rapid credit growth is directly proportional to an increase in potential credit risk (counterparty default). In addition to comprehensive credit assessment at the initial stage of credit initiation, banks need to monitor the condition of existing debtors. Empirically, difficulties in handling non-performing loans often occur due to delays in detection and preparation of action plans. In this case, losses due to non-performing loans can have implications for the bank's reputation and worsen its financial performance. This research aims to determine the effect of sentiment analysis (external sentiment prediction model [positive, neutral, and negative] with certain keywords) on the level of accuracy of the early warning system (EWS) model in predicting the credit quality of bank debtors in the coming months. This study found that upgrading EWS with sentiment analysis will give better accuracy levels compared to traditional EWS models. In addition, the predictive power of EWS (traditional and upgraded) is inversely proportional to the prediction period, the longer the target prediction time, and the less predictive power of the EWS model.