Default Prediction in the Finance Industry Based on Ensemble Learning: Combining Machine Learning and Deep Learning

Abstract

NOABSTRACT

Financial institutions face significant challenges in predicting loan defaults, which directly impact the non-performing loan (NPL) rate. Incorrect predictions can lead to misinformed decisions and substantial financial losses.

This study aims to enhance default prediction by employing advanced ensemble learning techniques in machine learning and deep learning.

Instead of relying on transformation, fine-tuning, or single algorithm models, this research focuses on combining multiple models using voting and stacking techniques, particularly highlighting a stacking model combining Light Gradient Boosting Machine (LGBM) and Artificial Neural Networks (ANN).

The ensemble learning methods, especially the LGBM-LSTM and XGB-LSTM stacking models, showed higher precision in identifying borrowers who defaulted, while the LGBM-LSTM and XGB-LSTM voting models excelled in recall and achieved an F1-score 0.1% higher. Both the stacking and voting models attained AUC values close to 90%, indicating strong overall classification performance.

The findings not only contribute to the fields of lending and peer-to-peer financial operations but also offer crucial insights that aid financial organizations in making well-informed decisions regarding loan processing and management.