Doctor of philosophy

Some insights from discussions with defaulting borrowers

These visits were undertaken along with collection executives. One textile businessman who had defaulted twice was willing to pay immediately and the reason for default was that he wanted to spend every bit of time and money to maximize his business during the festival season. Here the collection mechanism should be such that the executive collects from such people by visiting them and also the repayment schedule should be such that the installments are more during seasons of plenty.

In another case the borrower had defaulted 5 times. Here the following thoughts are worth considering:

1. 
   The reasons are the shop which the borrower started had not stabilized
   
2. 
   His daughter was married off 5 months back
   
3. 
   His second daughter was studying in engineering college.
   

The key lesson from this case is:

1. 
   The commitments of marriage and educational expenses should have been captured or at least there should be an ongoing relationship between the borrower and the lender through a local agent to capture this information.
   
2. 
   The scoring should have taken care of the new business with a lower score.
   
3. 
   In such cases there should be a high score for the guarantor and guarantor should be assessed rigorously and the family’s involvement in the borrowing should be ensured.
   
4. 
   In the case of business due diligence should be exercised when it is new and not established.
   

There was an instance where the customer had defaulted for 4 months and he had closed one business and started another. This once again is a case of un-stabilized income.

This should have been captured in scoring and a high score guarantor should have been tied up. These factors should have been reckoned in pricing and collection mechanism.

Insights - Process Related

FIs concur with the fact that customer information like occupation and income could be masked from the FIs to avoid any bias and also to facilitate an independent assessment. It would help the FIs to achieve the time target much better if DSAs get as far as possible accurate info of Customer's location and also do a preliminary screening.

In a number of cases the entries are made without any basis and absurd entries like age more than 100, experience more than age, expenditure more than income, disproportionate income etc are present. Also it would be helpful if the DSAs are given inputs on fundamentals of marketing and how to face competition.

An Integrated Model for Credit Scoring

As mentioned earlier prediction of borrower’s repayment behavior has many facets. Credit scoring, capturing the age, income and assets will mirror the financial face of the borrower. But in order to get a realistic and more accurate prediction the lender needs to know the other faces of the borrower like his attitudes, social behavior, conscious and subconscious behavior, borrower’s hidden agenda, his own personality known to himself and known to only others. Hence we have attempted a 360 degree appraisal of the borrower as shown in Figure-2.

F

igure - 12 An Integrated Model for Credit Scoring

From the psychographic perspective social consciousness, integrity, honesty, risk taking, cognitive abilities, ego, response in adversities, priorities and values in adverse situation, perseverance would enable to capture the personality of the borrower at the conscious and subconscious levels which will reveal the intentions to a considerable extent.

It is known from Johari’s window that there are areas of one personality hidden from self and certain others hidden from others. So such hidden parts of the personality are obtained by projective techniques and getting the opinion of the people about the borrower in their society with whom they come into contact like vegetable vendor, teacher, police, postman, hardware, fertilizer dealer etc. All these are especially important in the Indian context since borrower behavior is not known especially in the rural areas because(1)absence of banking habits(2)low usage of credit cards(3)non existence of smart cards(4)non sharing of customer database.

Apart from the questions in the scoring process and getting opinion about the borrower from various people in the society certain projective techniques shall be used to understand the subconscious and subliminal parts of the personality. Also a psychographic test shall be conducted to know the personality. Some of the questions are for example as follows:

(1) What is life for them (2) Do they like to continue as they are or they want to be different and how (3) At what cost do the want to be different (4) Do they like horses, mountains adventure, fire (5) Do they explore new things (6) What is risky for them (7) How much will they compromise to get what they want (8) What is sacrifice (9) What is a promise; How valuable is it (10) What is help (11) What is friendship (12) What is society, culture, values and how important are they.
(13) what is truth and lie and when can one lie (14) Do they respect society’s opinion and if so for what aspects of life (15) what can be compromised for money (16) what do you do when you are angry
(17) Happy moments in life and sad moments in life (18) is not jealousy good for growth (19) Most fearful situation and you got out /will get out. Refer Annexure I for the detailed questionnaire for credit scoring, upselling and cross selling.

6. FINDINGS OF THE QUANTITATIVE RESEARCH

Analysis and Findings

Table: 14

Profile of the Customers included for the analysis

Age

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	25 or less	1060	8.8	8.8	8.8
	26 to 35	3867	32.1	32.1	40.9
	36 to 45	2937	24.4	24.4	65.2
	46 to 55	1323	11.0	11.0	76.2
	56 and above	2866	23.8	23.8	100.0
	Total	12053	100.0	100.0

As can be expected a considerable percentage of the customers are in the age group of 26 to 35 and since majority of the borrowers use the loan for automobiles this distribution is explainable. The next major group of customers fall into the age group of 36 to 45 and the use the loans for buying automobiles for using in their business, agriculture etc.

Table: 15

Educational Qualification

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Degree	2090	17.3	17.3	17.3
	Higher Secondary	1404	11.6	11.6	29.0
	Missing Values	1104	9.2	9.2	38.1
	Other Qualification	5152	42.7	42.7	80.9
	Post Graduation	480	4.0	4.0	84.9
	S S L C	1823	15.1	15.1	100.0
	Total	12053	100.0	100.0

About 22% of the customers are graduates and Post Graduates and majority of them are in urban and semi urban areas. Other qualifications comprise of people who have other vocational qualifications and those who have not passed higher secondary. Most of the are in their own business and agriculture.

Table - 16

No. of Dependents

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	.00	1176	9.8	9.8	9.8
	1.00	668	5.5	5.5	15.3
	2.00	2776	23.0	23.0	38.3
	3.00	3015	25.0	25.0	63.3
	4.00	2743	22.8	22.8	86.1
	5.00	1041	8.6	8.6	94.7
	6 or more	634	5.3	5.3	100.0
	Total	12053	100.0	100.0

There is almost equal distribution of two dependents, three dependents and four dependents. Two dependents would be mostly parents and four dependents would be mostly parents, wife and child. Sometimes it is grand parents, sisters. The real financial picture would be obtained if the age, medical commitments, marriage commitment, extra income from the dependents like rent, pension, agricultural income etc., are captured.

Table - 17

Income

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Less than Rs. 5000	3165	26.3	26.3	26.3
	Rs. 5001 to Rs. 7000	2830	23.5	23.5	49.7
	Rs. 7001 to Rs. 9000	2043	17.0	17.0	66.7
	Rs. 9001 to Rs. 11000	1831	15.2	15.2	81.9
	Rs. 11001 to Rs. 13000	581	4.8	4.8	86.7
	Rs. 13001 and above	1603	13.3	13.3	100.0
	Total	12053	100.0	100.0

There is equal distribution in the income group of less than 5000Rs and in the range 5001 to 7000Rs. So the majority of the customers are not in the middle class. Due to the easy availability of loans and choice of cars most of the middle income group have migrated to four wheelers.

Table - 18

Other Income

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Rs.0.00	7404	61.4	61.4	61.4
	Rs. 1 to Rs. 2500	3812	31.6	31.6	93.1
	Rs. 2501 to Rs. 5000	373	3.1	3.1	96.2
	Rs. 5001 to Rs. 7500	464	3.8	3.8	100.0
	Total	12053	100.0	100.0