The Problem:

Financial institutions the world over have the financial checklist and tools to assess the creditworthiness of the borrower. These tools mainly focus on the borrower’s paying capacity, collateral, credit rating etc. Yet we all know the limitations of such tools as in many cases the default rates have been staggering. It has become an intractable problem as borrowers, for one reason or the other, become defaulters. Credit management, therefore, is posing a major challenge for financial institutions. One reason why the assessment fails is because the profiling of the borrower is heavily dependent on his/her financial health ignoring the psychological makeup of the person. A reliable and comprehensive approach would be to use both the financial tools as well as the psychometric tools to get a complete picture of the motivations, attitudes and financial background of the borrower. A McKinsey report states that Psychometric tests can lower default rates by 25%-40% and without any banker supervision the assessment is 45% of traditional assessment measures.

What is CXI?

The Creditworthiness Excellence Index(CXI) is an innovative tool that profiles the borrower on various psychological parameters that influence his borrowing behaviour. Modern research indicates that various traits and attributes influence our spending patterns. These attributes also determine if the borrower has the entrepreneurial qualities in him or not. The CXI measures these attributes and comes up with a picture of the borrower with a high degree of accuracy. This coupled with the financial appraisal would make the lending process foolproof.

Some of these attributes and their descriptions are given below:

  • Conscientiousness
  • Business Skills
  • Ethics & Honesty
  • Fluid Intelligence-
  • Extroversion
  • Confidence
  • Need for Achievement
  • Locus of Control
  • Passion for Work

A brief description of these attributes is given below:

·      Conscientiousness

Conscientiousness implies being perfect in any assignment. Such individuals do believe in hard work and planning. They are disciplined and organised in various tasks/projects that they undertake. Being cautious is also one of the aspects of conscientiousness. Usually, a credible borrower is a very conscientious one and from that viewpoint, we need to assess the borrower on this attribute of personality.

·      Business Skills

To run any enterprise successfully one needs to have few business skills. A few of the important and critical business skills are the ability to plan and set goals, the ability to motivate and network with colleagues and customers, time management, team building and prudent fiscal discipline.

·      Ethics & Honesty

While Business Skills denote the ability present or absent in the borrower ethics and honesty represent the willingness element of the personality. Our research indicates that conscientiousness is the most accurate predictor of ethical and honest behaviour.

·      Fluid Intelligence

Fluid Intelligence as opposed to Crystalized Intelligence- a concept proposed by Cattell is the ability to be flexible, and adaptable in solving problems. These are the people who innovate and think out of the box. In the Transactional Analysis framework, they have the “Child” mask. Such fluid intelligence is an attribute of a successful entrepreneur.

·      Extroversion

The extroverted person reflects assertiveness, optimism, drive, dominance and leadership. It also indicates that such a profile is more likely to take risks. Now it needs to be determined if this is a moderate risk or a foolhardy risk. Both have serious implications for creditworthiness.

·      Confidence

For starting any new venture, the key attribute needed is confidence. Confidence in oneself as well as a strong belief that one can make a difference.

·      Need for Achievement

To achieve perfection and success in any enterprise is reflected in the need for achievement. People with a high degree of the need for achievement set for themselves goals that have a stretch in them. Not very easy and also not unrealistic is the pattern for setting the goals. Such people always focus on results – an essential attribute of entrepreneurs.

·      Locus of Control

People with an internal locus of control always believe in their efforts to produce results. People with external locus of control always take solace in factors such as luck or destiny to rationalize their success or failure. People with internal locus of control are more likely to be good at managing a business.

·      Passion for Work

Individuals with a high degree of passion for work or self-driven. Their intrinsic motivation is always at its peak. They are also passionate about what they do and they have a healthy dislike for failure.

The Methodology:

The methodology for arriving at the creditworthiness consists of the following three steps:

  • Interview with the borrower and his family and close associates (this helps get a 360-degree perspective)
  • Administration of the questionnaire (through a tablet or paper pencil test). The test takes around 60 minutes and is culture-free. It can be administered to any group and can be easily translated into the local language.
  • Administration of the financial tools

The final result is a numerical score with a clear go or no go for providing the loan.