Development of a Credit Scoring Methodology for Assessment of Microfinance Borrowers

Abstract

Since the early national plans policy planners have emphasized on strengthening the newlinelink between improving accesses to financial markets and reducing poverty a stance newlinethat has had influence globally Newer approaches include the partial dereg newlineulating of interest rates new institutional forms for cooperatives that put the emphasis back on newlineintermediating the savings of their members and a nationwide attempt pioneered by newlinenon governmental organizations and now supported by the state to create l newlineinks between commercial banks non governmental organisations NGOs and informal newlinelocal groups Surveys show that informal sector lenders remain a strong presence in newlinerural India and are still able to derive competitive advantage over the formal and semi formal sectors newlineIndia has the largest number of poor in the world Reducing poverty is a key element newlinein our inclusive growth strategy N umerous Schemes for poverty alleviation have not newlinebeen able to deliver benefits commensurate with the investment mad e over years newlineIndebtedness and low employment opportunities are one of the major plausible reasons newlinefor poverty Credit intervention is considered to be an effective tool to eliminate the newlinecurse of poverty and directed lending has taken a centre stage of social lending since nationalisation of banks and creation of regional rural banks NABARD experimented newlinegroup lending methodology in order to improve efficacy of credit which proliferated newlineexponentially Delivering small size of credit to poor in a cost effect newlineive manner is still a challeng Traditionally micro finance institutions MFIs have used subjective scoring the use of defined parameters such as experience in the business net margin of the business newlineprofitability and disposable income to analyze business and credit risk Effectiveness newlineand accuracy of subjective scoring is dependent on experience and skills of credit newlineofficer which limits the growth of lending business newlineIn contrast statistical credit scoring forecasts risk based on quantified characteristics newlinerecorded in a database of loan app.