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October 2, 2025Open Access

Explainable Artificial Intelligence Credit Risk Assessment using Machine Learning

Key Points

LightGBM provides the highest accuracy in assessing credit risks, optimizing the balance between approvals and defaults.
Performance metrics like ROC-AUC, precision, recall, and F1-score were evaluated to ensure model effectiveness and reliability.
Custom imputation and standardization were incorporated in data preprocessing to enhance model predictions while managing class imbalance.
Applicant-specific reports generated by the system enhance decision-making transparency, utilizing explainable AI techniques like SHAP and LIME.

Abstract

This paper presents an intelligent and transparent AI-driven system for Credit Risk Assessment using three state-of-the-art ensemble machine learning models combined with Explainable AI (XAI) techniques. The system leverages XGBoost, LightGBM, and Random Forest algorithms for predictive analysis of loan default risks, addressing the challenges of model interpretability using SHAP and LIME. Preprocessing steps include custom imputation, one-hot encoding, and standardization. Class imbalance is managed using SMOTE, and hyperparameter tuning is performed with GridSearchCV. The model is evaluated on multiple performance metrics including ROC-AUC, precision, recall, and F1-score. LightGBM emerges as the most business-optimal model with the highest accuracy and best trade off between approval and default rates. Furthermore, the system generates applicant-specific XAI visual reports and business impact summaries to ensure transparent decision-making.

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