Index Advisory develops psychometric test to measure borrower’s credit profile

Given the high levels of non-performing assets of banks, wouldn’t it be great if a lender knew which borrowers were more likely to default? Good credit score is the golden benchmark used by lending institutions in deciding credit worthiness. But often, there is no data or only assessing the ability to repay — through income and assets — does not answer the question whether they have the willingness to pay.

Enter psychometric test to assess the socio-psychological profile of the borrower. “The tests can enable lenders to make a better loan-risk assessment and considerably reduce the credit risk borne by them,” says Yogesh Mariwalla, Executive Director of Index Advisory, which has developed a technique for measuring the borrower’s credit profile. “Most of the NBFCs and banks credit is based on the ability to pay. What is missing is the intention-to-pay measure. Psychometric tests provide this measure and as a combination it makes credit undertaking very robust,” he says.

The main parameters measured are integrity and risk-taking. Other parameters such as business acumen and ambition may be used for specific products — SME loans — for instance.

“Parameters are decided based on discussion with the client about the target population,” explains Mariwalla. For instance, questions for education loans would be very different from that of medical loans due to the nature of borrower demographic and loan purpose.

“In the medical loan space, loans are nearly always given on psychometric testing. The collection efficiencies has been 97-98 per cent, which indicates that the method works,” he says. Back testing on about 250 SME loans showed that the days-past-due, a measure of credit problems, was 64 days for those who did not clear the test cut-off the test versus only 3.4 days for those who cleared the test cut-off. .

There are of course some issues with the tests. For instance, people may not state the full truth as they either misunderstand the question or wilfully lie. Mariwalla says that this is overcome in three ways.

One, the timing is such that it forces top of the mind recollection. Two, similar questions are asked at different places and the tool measures whether the answers are similar. Consistency in answering and pattern checking will ensure there is reduced risk of someone to game the system. These, questions are also changed and made more appropriate from time to time to ensure that test takers can relate to the question. “Tests must normally be revamped every 3.5 years to ensure it is stays relevant,” he says.

The company has built an impressive list of clients including Medtronic, Arogya Finance, Kinara Capital, Electronica Finance, Orb Energy and Vistaar Finance. The company develops the test for the lending institution for a fee. Some clients also use the company’s services for data analysis.

Index Advisory is profitable currently and is looking at subscription-based service offering. It also plans to expand to wider set of loans and also offer services to client located beyond India. It has already developed test for markets in Philippines and Malaysia. “We are seeing good traction in South America and Africa,” says Mariwalla.

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