A mathematical programming approach with revenue management in home loan pricing

Abstract

We formulate a dynamic pricing model for home loans for a bank. The model optimizes the net present value of money available at the end of 15 years subject to pricing limits and cash flows. We collected the real data from a leading nationalized bank in India to develop the relationship between interest rate (price) and number of loans sanctioned (demand). We then assume different versions of the demand function (linear, exponential and rectangular hyperbolic). We also develop the relationship of default probability as a function of interest rate. In all the three cases, with the real data we demonstrate that the dynamic pricing of home loans does yield better results than the currently used static pricing. We also discuss the sensitivity of our result to change in the parameters of the demand equations.