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UBU Finance System Platform Documentation — Credit Line Calculation Guide

Introduction

This documentation provides a comprehensive guide to understanding how the adjusted credit line is calculated for loan applications in the UBU Finance System Platform. The credit line calculation is a critical component of the loan approval process, determining whether a Balance Indexing Account is eligible for a requested loan amount.

Platform Overview

System Platform URL: https://system.ubu-economy.com

The credit line calculation system analyzes account transaction history, income patterns, and volatility to determine the maximum credit amount available to a borrower. This ensures responsible lending practices and risk management.

Credit Line Eligibility Overview

For a loan application to be approved, the Balance Indexing Account must have an adjusted credit line that is greater than or equal to the requested loan amount. If the adjusted credit line is less than the requested principal amount, the account is marked as not eligible for the loan.

Key Parameters

The Credit Line calculation is based on three key parameters set in the Credit Line Eligibility Policy for the Loan Product:

  1. Risk Factor Multiplier (k): A multiplier used to adjust income based on volatility. Higher values result in more conservative credit line calculations.

  2. Inflow To Loan Ratio (ILR): The ratio used to calculate affordability capacity, representing the percentage of income that can be allocated to loan repayments.

  3. Credit Score Months: The number of months considered for analysis. This determines the historical period used to evaluate account performance.

Calculation Components

The credit line calculation involves multiple steps, each building upon previous calculations. The following sections detail each component with formulas and explanations.

Abbreviations

  • TMI: Total Monthly Inflows on a balance indexing account
  • ILR: Inflow To Loan Ratio
  • k: Risk Factor Multiplier
  • n: Credit Score Months (number of months considered for analysis)
  • i: Month index (e.g., month 1, month 2)
  • ECV: Effective Collateral Value
  • PD: Probability of Default
  • LGD: Loss Given Default
  • EAD: Exposure at Default

Step-by-Step Calculation Process

1. Mean Inflow Calculation

Formula: Mean Inflow = (TMI1 + TMI2 + TMI3 + ... + TMIn) / n

Description: Calculates the average total monthly inflows over the analysis period.

Where: - TMI is Total Monthly Inflows on a balance indexing account - n is the credit score months (number of months considered for analysis)

2. Monthly Deviation Calculation

Formula: Xi = TMI(i) - Mean Inflow

Description: Calculates the difference between each month's total monthly inflow and the mean inflow.

Where: - i is the month considered (e.g., month 1, month 2) - Xi represents the deviation for month i

3. Squared Monthly Deviations

Formula: Xi² = (Xi) × (Xi)

Description: Squares each monthly deviation to eliminate negative values and emphasize larger deviations.

Where: - Xi is the monthly deviation for month i

4. Sum of Squared Deviations

Formula: Sum = X1² + X2² + ... + Xn²

Description: Sums all squared deviations to get a total measure of variability.

Where: - n is the credit score months

5. Mean of Deviation

Formula: Mean of Deviation = Sum of Squared Deviations / credit_score_months

Description: Calculates the average of squared deviations, representing the variance in income flows.

6. Volatility (Standard Deviation)

Formula: Standard Deviation = √(Mean of Deviation)

Description: The square root of the mean of deviation, representing income variability. Higher values indicate more inconsistent income patterns.

7. Adjusted Income

Formula: adjusted_income = mean Inflow - (k × volatility)

Description: Adjusts the mean income downward based on volatility and risk factor. This conservative approach accounts for income uncertainty.

Where: - k is the risk factor multiplier

8. Movement Weight

Formula: movement_weight = mean Inflow / (mean Inflow + volatility)

Description: A weight factor representing the stability of income flows. Values closer to 1 indicate more stable income, while values closer to 0 indicate higher volatility.

9. Average Net Movement

Formula: average_net_movement = (Total inflows - Total outflows) / analysis_months

Description: Calculates the average net cash flow per month over the analysis period, where analysis_months is the credit score months.

10. Growth Score

Formula: growth_score = (InflowLastMonth - InflowFirstMonth) / InflowFirstMonth

Description: Measures the growth rate of inflows from the first month with inflows to the last month. Positive values indicate growth, while negative values indicate decline.

11. Average Frequency Inflows

Description: Calculates the normalized average frequency of inflows per month.

Calculation Steps:

  1. Get Monthly Inflow Counts: Count the number of inflow transactions for each month
  2. Normalize Each Month: For each month, normalize the count using min-max normalization:
  3. Normalized Value = (Count - min) / (max - min)
  4. Where min is the minimum count across all months and max is the maximum count
  5. Calculate Average: average_frequency_inflows = Sum of Normalized Values / n

12. Movement Score

Description: A composite score combining multiple factors to assess account activity and stability.

Calculation Steps:

  1. Get 4 Components:
  2. Mean Inflow
  3. Frequency Average (average_frequency_inflows)
  4. NetMovement Average (average_net_movement)

  5. Growth (growth_score)

  6. Find Min and Max: Determine the minimum and maximum values across all four components

  7. Normalize Each Component:

  8. Normalized Value = (Component - min) / (max - min)

  9. Sum Normalized Values:

  10. movement_score = Normalized Mean + Normalized Frequency + Normalized NetMovement + Normalized Growth

13. Affordability Capacity

Formula: affordability_capacity = ILR × meanInflow

Description: Calculates the maximum loan amount the borrower can afford based on their average income and the Inflow To Loan Ratio.

Where: - ILR is the Inflow To Loan Ratio

14. Credit Line (Final Calculation)

Formula: credit_line = AdjustedIncome × MovementScore × MovementWeight × RiskFactorMultiplier

Description: The final calculated credit line available to the borrower. This represents the maximum loan amount the account is eligible for based on all calculated factors.

Complete Calculation Example

This section provides a detailed walkthrough of a complete credit line calculation using real data.

Given Data

  • Monthly Inflows: [0, 0, 0, 0, 0, 1000]
  • Monthly Outflows: [0, 0, 0, 0, 0, 107.45]
  • Analysis Months: 6
  • Risk Factor Multiplier (k): 3
  • ILR (Inflow To Loan Ratio): 0.8

Calculation Results

1. Mean Inflow

Formula: mean = (TM1 + TM2 + ... + TM6) / 6

Calculation: 

mean = (0 + 0 + 0 + 0 + 0 + 1000) / 6
     = 1000 / 6
     = 166.66666667

Result: 166.67

2. Monthly Deviations

Formula: Xi = TM(n) - mean

Calculation: - Month 1: 0 - 166.67 = -166.67 - Month 2: 0 - 166.67 = -166.67 - Month 3: 0 - 166.67 = -166.67 - Month 4: 0 - 166.67 = -166.67 - Month 5: 0 - 166.67 = -166.67 - Month 6: 1000 - 166.67 = 833.33

Result: [-166.67, -166.67, -166.67, -166.67, -166.67, 833.33]

3. Squared Monthly Deviations

Formula: Xi² = (Xi) × (Xi)

Calculation: - Month 1: (-166.67) × (-166.67) = 27777.78 - Month 2: (-166.67) × (-166.67) = 27777.78 - Month 3: (-166.67) × (-166.67) = 27777.78 - Month 4: (-166.67) × (-166.67) = 27777.78 - Month 5: (-166.67) × (-166.67) = 27777.78 - Month 6: 833.33 × 833.33 = 694444.44

Result: [27777.78, 27777.78, 27777.78, 27777.78, 27777.78, 694444.44]

4. Sum of Squared Deviations

Formula: Sum = X1² + X2² + ... + X6²

Calculation: 

Sum = 27777.78 + 27777.78 + 27777.78 + 27777.78 + 27777.78 + 694444.44
    = (27777.78 × 5) + 694444.44
    = 138888.90 + 694444.44
    = 833333.34

Result: 833333.33

5. Mean of Deviation

Formula: mean_of_deviation = sum_of_squared_deviations / 6

Calculation: 

mean_of_deviation = 833333.33 / 6
                  = 138888.89

Result: 138888.89

6. Standard Deviation (Volatility)

Formula: standard_deviation = √(mean_of_deviation)

Calculation: 

standard_deviation = √138888.89
                   = 372.68

Result: 372.68

7. Adjusted Income

Formula: adjusted_income = mean - (k × volatility)

Calculation: 

adjusted_income = 166.67 - (3 × 372.68)
                = 166.67 - 1118.04
                = -951.37

Result: -951.37

8. Movement Weight

Formula: movement_weight = mean / (mean + volatility)

Calculation: 

movement_weight = 166.67 / (166.67 + 372.68)
                = 166.67 / 539.35
                = 0.309

Result: 0.309

9. Average Frequency Inflows

Step 1: Get Monthly Inflow Counts - Monthly counts: [0, 0, 0, 0, 0, 1] (1 transaction in month 6)

Step 2: Normalize Each Month - min = 0, max = 1 - Month 1: (0 - 0) / (1 - 0) = 0 / 1 = 0 - Month 2: (0 - 0) / (1 - 0) = 0 / 1 = 0 - Month 3: (0 - 0) / (1 - 0) = 0 / 1 = 0 - Month 4: (0 - 0) / (1 - 0) = 0 / 1 = 0 - Month 5: (0 - 0) / (1 - 0) = 0 / 1 = 0 - Month 6: (1 - 0) / (1 - 0) = 1 / 1 = 1

Step 3: Calculate Average 

average_frequency = (0 + 0 + 0 + 0 + 0 + 1) / 6
                  = 1 / 6
                  = 0.1667

Result: 0.1667

10. Average Net Movement

Formula: average_net_movement = (Total inflows - Total outflows) / analysis_months

Calculation: 

Total inflows = 0 + 0 + 0 + 0 + 0 + 1000 = 1000
Total outflows = 0 + 0 + 0 + 0 + 0 + 107.45 = 107.45
average_net_movement = (1000 - 107.45) / 6
                     = 892.55 / 6
                     = 148.76

Result: 148.76

11. Growth Score

Formula: growth_score = (InflowLastMonth - InflowFirstMonth) / InflowFirstMonth

Calculation: 

First month with inflows > 0: Month 6 = 1000
Last month: Month 6 = 1000
growth_score = (1000 - 1000) / 1000
             = 0 / 1000
             = 0

Result: 0

12. Movement Score

Step 1: Get 4 Components - Mean Inflow: 166.67 - Frequency Average: 0.1667 - NetMovement Average: 148.76 - Growth: 0

Step 2: Find Min and Max - min = min(166.67, 0.1667, 148.76, 0) = 0 - max = max(166.67, 0.1667, 148.76, 0) = 166.67

Step 3: Normalize Each Component - Normalized Mean: (166.67 - 0) / (166.67 - 0) = 166.67 / 166.67 = 1.0 - Normalized Frequency: (0.1667 - 0) / (166.67 - 0) = 0.1667 / 166.67 = 0.001 - Normalized NetMovement: (148.76 - 0) / (166.67 - 0) = 148.76 / 166.67 = 0.8926 - Normalized Growth: (0 - 0) / (166.67 - 0) = 0 / 166.67 = 0

Step 4: Sum Normalized Values 

movement_score = 1.0 + 0.001 + 0.8926 + 0
               = 1.8936

Result: 1.8936

13. Affordability Capacity

Formula: affordability_capacity = ILR × meanInflow

Calculation: 

affordability_capacity = 0.8 × 166.67
                      = 133.33

Result: 133.33

14. Credit Line (Final Calculation)

Formula: credit_line = AdjustedIncome × MovementScore × MovementWeight × RiskFactorMultiplier

Calculation: 

credit_line = -951.37 × 1.8936 × 0.309 × 3
            = -1670.01

Result: -1670.09

Example Summary

In this example, the calculated credit line is -1670.09, which is a negative value. This indicates that the account is not eligible for any loan amount, as the adjusted credit line is negative. The negative result is primarily due to:

  1. Low and inconsistent income: Only one month had inflows (1000), with five months having zero inflows
  2. High volatility: The standard deviation (372.68) is significantly higher than the mean (166.67)
  3. Conservative risk adjustment: The risk factor multiplier of 3 further reduces the credit line

This demonstrates how the system protects against lending to accounts with unstable income patterns, even if they show occasional high inflows.

Understanding Negative Credit Lines

A negative credit line indicates that the account is not eligible for loans based on the current analysis. Common reasons include:

  • Insufficient transaction history: Not enough months with meaningful inflows
  • High income volatility: Large variations in monthly inflows
  • Conservative risk settings: High risk factor multiplier values
  • Low average income: Mean inflow is too low relative to volatility

For more information on related loan management features, refer to:

Platform Access

System Platform URL: https://system.ubu-economy.com

The credit line calculation is automatically performed when viewing loan application eligibility details. Users with appropriate permissions can access these calculations through the loan application management interface.