Credit risk refers to the potential loss incurred when borrowers fail to make payments on their debts. This book focuses on a Probability of Default (PD) rating modeling, widely considered a cornerstone of credit risk.

The motivation for writing this book arises from two primary factors. Firstly, despite the substantial increase in the number of books and articles over the last decade, significant misalignment continues to exist between practical application and academic research. Secondly, recent progress in analytics and technology has seemingly shifted the focus in credit risk towards tools, sometimes neglecting the fundamental principles and objectives of the modeling process. Conversations surrounding programming languages and algorithms can overshadow the crucial task of capturing and addressing the most important business inputs within the model.

Following the motivation, this book offers an overview of the critical steps in developing and validating a probability of default models. Moreover, it presents practical examples that aim to guide readers through the entire modeling process, with a particular emphasis on design rather than focusing solely on statistical methods. These examples aim to equip and inspire readers to design a tailored approach that aligns with their specific model's implementation environment. Although the book demonstrates the exercises in the statistical package `R`, the tool should not be in the foreground. Rather than emphasizing the code itself, we encourage readers to adopt a process-oriented perspective when approaching the code. This approach enables readers to replicate the same or similar designs using their preferred software. While the book primarily emphasizes the modeling processes within the banks with Internal Rating Based Models (IRB banks), it is essential to note that the described methods are not limited solely to them. The methods can be extended and applied to non-IRB banks as well. Readers and practitioners are encouraged to select and implement the chapters that best suit their specific use cases, focusing on managerial models.

Finally, the author encourages readers to engage in critical thinking as they progress through the contents, considering that not all methods utilized in real-world scenarios are suitable for every circumstance, and the effectiveness of each method may not be universal.