Though the Reserve Bank had advised banks to use credit scoring for loans up to R2 crore way back in 2009, and again reminded them of the issue last year (see link, http://www.financialexpress. com/news/credit-scoring-a-tool-to-aid-bank-lending/ 1214701), banks were sloth to discover the potential of a lender evaluation system.
But the good news is that EFL is in talks with a few public sector banks and is likely to sign up one of the largest private sector banks to scale up credit scoring in India.
Credit scoring is a computer-based test to assess the credit worthiness of a borrower. Though credit scoring is used in the US in consumer credits like mortgages and auto loans, EFL has got into it as a social project. A branch of the Harvard Kennedy Schools Center for International Development, EFL came up with a psychometric test to address the problem of what is called the 'missing middle in financing.
Researchers have observed that developing countries have many informal micro-enterprises and large corporations, but very few SMEs. Underlying this missing middle problem is that while there is a rapidly expanding micro-credit sector and sophisticated corporate banking, there is relatively little financing for SMEs.
Studies show 2.2 billion people around the world do not have access to formal financial services, thus, creating a
$2.5 trillion financing gap for MSMEs. EFL realised that credit scoring can be an effective tool to plug this gap to an extent.
In the EFL psychometric test, a borrowers willingness to repay and entrepreneurial ability are analysed through 150 questions, through a 45-minutes test. The questions also test a loan applicant on his business skills, fluid intelligence, ethics & honesty and attitudes & beliefs.
The test is usually given on a personal computer or a tablet, with or without an internet connection. It can also be administered through android devices. The questions generally seek simple yes/no or multiple choice answers to real life concerns, besides asking to memorise numbers or match visuals. In India, the test is available in six vernacular languages.
Maddie Brandenburger of EFL told FE that you will never see the same set of questions twice, adding that 3,000 questions in the EFL repository are continually changed, reordered and randomised to prevent gaming or cheating by the applicant. EFL also uses statistical trackers to identify loan officer and staff patterns of influence to prevent staff manipulation.
She said EFL has partners in 20 countries, who have made over 70,000 assessments in 26 languages and disbursed over $250 million. Tests are modified for each country. Globally consistent traits, Brandenburger says, compose 55% of EFLs predictive power, while locally calibrated traits compose 45%.
The EFL score, she says, is a three-digit number, usually between 300 and 500. The score helps banks in many cases to lend without collateral. A Mckinsey report says psychometric testing of loan applicants can lower default rates by 25-40% and lower the cost of assessment by 55% compared to traditional assessment measures.
EFL, whose pre-employment screening tools are used by more than a third of US companies, claims its psychometric credit screening is developed based on its 40 years of academic research on entrepreneurs.
EFL entered Indian market in April 2013 with a partnership with Janalakshmi, an innovative and tech-savvy microfinance player. Janalakshmi has roped in two more partners, and conducted about 5,000 tests by December 2013.
Psychometric test, quotes KS Ramdas, CEO of Janalakshmis Jana Urban Foundation, is all about betting on the jockey, not the horse. Thats a fresh lead for Indias banking industry, which lends on the bases of project report, collateral and seed capital.