PROJECT PROPOSAL

4CSPL2041 – INTRODUCTION TO MACHINE LEARNING

PROJE
Loan Approval Prediction using machine learning
CT
TITLE
DOMAIN FINANCE
OR FIELD
TEAM
Soumya (21BBTCS225), Y.B Tulasi (21BBTCS274), Sristi J (21BBTCS228)
MEMBE
RS

SUBMISSI Faculty In charge Signature

ON DATE 06/05/2024 APPROVED Prof. Shivakumar
BY: - Shriya

I. The term loan refers to a type of credit vehicle in which a sum of money is lent to another
INTRODUCTI party in exchange for future repayment of the value or principal amount. In many cases,
ON TO the lender also adds interest or finance charges to the principal value, which the borrower
DOMAIN AND must repay in addition to the principal balance.
PROBLEM
Loans may be for a specific, one-time amount, or they may be available as an open-ended
IDENTIFIED
line of credit up to a specified limit. Loans come in many different forms including
secured, unsecured, commercial, and personal loans And has a presence across areas such
as cities, towns and village areas. A Customer- first requests for a loan and after that
Finance Company validates the customer eligibility for the loan and of approve. Details
like marital status, gender ,education, and number of dependents, Income, Loan Amount,
credit history, and others are given in the form to fill up by the applicants. Therefore, a
robust model is built taking those details as input to verify whether an applicant is eligible
to apply for loan or not. The target variable here is Applicants "Loan Status" and the other
variables are predictors. PROBLEMS IDENTIFIED ARE: Lack of Credit Information:
There was limited access to accurate credit information about potential borrowers. Banks
and lending institutions had to rely on personal references and face-to-face interviews,
which were time-consuming and not always reliable. Manual Processes: Loan approval
processes were manual and labor-intensive. This slowed down the approval process and
made it more challenging to handle a large volume of applications efficiently. High Risk:
Without reliable credit information, lenders faced higher risks of loan defaults. This made
them more cautious in approving loans for a large number of people. Limited
Documentation: In many cases, potential borrowers might not have had the necessary
documentation to prove their creditworthiness, such as proof of income or employment
history. Regulatory Constraints: Strict regulations around lending practices, including
interest rates and credit requirements, may have restricted the ability of lenders to approve
loans easily. Economic Conditions: Economic instability or downturns could impact the
ability of borrowers to repay loans, leading lenders to tighten their lending
standards .Fraud Risks: The risk of fraud and identity theft could make lenders more
cautious about approving loans without thorough verification. Geographical and
Technological Limitations: In remote areas or places with limited access to technology, it
was more difficult for banks and lending institutions to assess and approve loans. Over
time, advancements in technology, data analytics, and credit scoring have addressed many
of these challenges, making it easier for lenders to approve loans for a larger number of
people.
II. BACKGROUND Banks are making major part of profits through loans. Through lots of people are
applying for loans. Bank employees check the details of applicant manually and give the
loan to eligible applicants checking the details of all the applicants takes a lot of time.
Traditional methods of assessing credit worthiness often fall short due to reliance on
historical data and rigid criteria, leading to inefficiencies and inaccuracies in loan
evaluation and inaccuracies in loan evaluations. It’s hard to select the genuine
application who will apply the loan. While doing the process manually, lot of
misconception may happen to select the genuine applicant. Through banks approve
loans after a regress process of verification and testimonial but still there is no surety
whether the chosen hopeful is the right hopeful or not. With the use of machine learning
algorithm there can be a optimal and sustainable solution to select the genuine
application and predicting the confidence the application to be approved.

III. OBJECTIVES I. The objective of this project is to develop a machine learning model that can
predict whether a loan application will be approved or not based on various
features and attributes of the applicant.
II. To provide a better user experience for loan applicants by providing them with
quicker and more accurate feedback on their loan applications, reducing wait
times and uncertainty.
III. To provide insights into the loan approval process and help financial institutions
make more informed decisions about lending.
IV. To understand the insights of the application and classify genuine applications.
V. To speed up the application selection process
VI. To provide the customer the current application status accurately
VII. To analyze the customer historical data accurately
VIII. To provide a timely approval of loan based on the historical data
IX. To improve the customer experience throughout the whole loan approval
progress.
IV.
METHODOLOGY  Data Collection: For a loan prediction model, data collection involves gathering
personal, financial, and credit information to assess an applicant's financial
situation and creditworthiness. This includes personal details like age, gender,
and residential history, as well as financial information such as income sources,
employment status, regular monthly expenses, and assets. Credit history is
crucial and should include credit scores, credit reports, and payment history to
evaluate the applicant's borrowing habits and reliability. Additionally, loan
application details such as the type, amount, term, and purpose of the loan
provide context for the loan decision. Behavioral data, such as spending habits
and financial responsibility, may also offer insights into the applicant's suitability
for a loan. Other important data includes collateral details for secured loans,
guarantor information if applicable, and public records such as bankruptcies or
judgments. Accurate, up-to-date data collected with respect for privacy and
security regulations is essential for a reliable loan prediction model.

 Data Preprocessing: Data preprocessing for a loan prediction model includes

several key steps. First, handle missing data by either imputing missing values
or removing incomplete rows or columns. Next, normalize or standardize
numerical features to bring them to a common scale and improve model
performance. Identify and handle outliers that may skew predictions. Convert
categorical features to numerical format using encoding techniques such as one-
hot encoding or label encoding. Create new features (feature engineering) from
existing data to provide additional context. Finally, split the data into training
and testing sets to evaluate the model's performance accurately.

 Feature Selection: Feature selection in a loan prediction model involves

choosing the most relevant features for accurate predictions. Begin with a broad
set of features, then use statistical methods such as correlation analysis to assess
relationships between features and the target variable. Remove highly correlated
features to avoid redundancy. Apply feature selection techniques like recursive
feature elimination, mutual information, or feature importance from tree-based
models to rank features by relevance. Evaluate different combinations of features
using cross-validation to find the optimal subset. This process helps improve
model performance and interpretability while reducing overfitting.
 Model Development: Model deployment in a loan prediction model involves
 transitioning the trained model to a production environment. Begin by testing
the model thoroughly on unseen data to ensure its reliability and accuracy.
Integrate the model with the lending platform's existing systems, such as
application processing and decision-making software. Monitor the model's
performance continuously in production to detect any drift or decline in
accuracy. Implement a feedback loop to update the model periodically with new
data and retrain it as needed. Ensure compliance with regulatory requirements
and maintain data privacy and security standards during deployment. Lastly,
establish clear documentation and protocols for maintaining and troubleshooting
the model in production.

 Model Evaluation :Model evaluation in loan prediction involves using

performance metrics like accuracy, precision, recall, and F1-score to assess
prediction quality. Analyze the confusion matrix to understand correct and
incorrect predictions. Evaluate bias and fairness to ensure the model treats all
demographic groups equitably. Continuously monitor the model's performance in
production, including its economic impact, and test for robustness and
explainability.

 Deployment and Validation: Deployment involves integrating the trained ML

model into the loan processing system for real-time use, ensuring compatibility
with existing systems and continuous monitoring for performance and drift.
Validation uses techniques like cross-validation to assess the model's
performance on unseen data, ensuring it generalizes well and avoids overfitting.
Validation helps verify reliability, consistency, and fairness across different data
samples. Adjust the model based on validation results to maintain accuracy and
trustworthiness.
V. REFERENCES i. “Loan Prediction by Machine Learning Models,” International Journal of
Engineering and Techniques, (2019).
ii. “HOME LOAN DATA ANALYSIS AND VISUALIZATION,” International
Journal of Creative Research Thoughts (IJCRT), (2021).
iii. “Neural Networks for Prediction of Loan Default Using Attribute Relevance
Analysis”
iv. “Loan Approval Prediction based on Machine Learning Approach,” IOSR Journal
of Computer Engineering, (2016).
v. “Loan Credibility Prediction System Based on Decision Tree Algorithm,”
International Journal of Engineering Research & Technology (IJERT)
vi. “An Approach for Prediction of Loan Approval using Machine Learning
Algorithm,” International Conference on Electronics and Sustainable
Communication Systems (ICESC), (2020).
vii. “Prediction of Loan Status in Commercial Bank using Machine Learning
Classifier,” Proceedings of the International Conference on Intelligent Sustainable
Systems, (2017).
viii. Prediction for loan approval using machine learning algorithm. International
Research Journal of Engineering and Technology (IRJET), 8(04).
ix. Machine learning techniques for recognizing the loan eligibility. International
Research Journal of Modernization in Engineering Technology and Science.
x. Accurate loan approval prediction based on machine learning approach. Journal of
Engineering Science
xi. Analysis and Forecasting of bank loan approval data using machine learning
algorithms.
xii. “Loan Credibility Prediction System Based on Decision Tree Algorithm”,
International Journal of Engineering Research & Technology
xiii. “ Customer Classification And Prediction Based On Data Mining Technique” ,
International Journal of Emerging Technology and Advanced Engineering