A Project Report on

“CREDIT SCORING TOOL FOR NEW INDIVIDUAL

LOAN PRODUCTS”
Submitted to

KIIT SCHOOL OF RURAL MANAGEMENT

Bhubaneswar, India

Submitted by
Abhisek Tak (9201002)
Rojalin Pattnaik (9201032)

Host Organization: MIMO FINANCE

Faculty Guide – Dr. Prasun Das

MTS-1 Coordinator – Prof. Nandini Sen

A report submitted in partial fulfillment of the requirement for Masters in Rural

Management, 2009-11
Date of submission: 18th September 2010

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 SCHOOL OF RURAL MANAGEMENT, KIIT UNIVERSITY

BHUBANESWAR.

The MTS-1 Report of:

Abhisek Tak (9201002)

Rojalin Pattnaik (9201032)

Candidate for the degree of MBA Rural Management

Is hereby APPROVED

Dr. Prasun Das

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Executive Summary
Mimo Finance is a Micro Finance Institution (MFI) in north India working mainly for
empowering women and changing lives of poor. They have two departments, MESO and Joint
Liability Group (JLG).They give loans for four products in MESO department to individuals,
that are –

Products of Mimo Finance

Joint Liability Group (JLG) MESO Loan

Individual Home Loan Individual Micro Enterprise loan

Individual Business Loan

Individual Diary Loan

MIMO create sustainable sources of income for women, which enables them to fulfill their
greater corporate mission to help families obtain health care, access to education, and the
empowerment necessary to make choices that best serve their needs. They work in 6 states of
India (Uttarakhand, Uttar Pradesh, Hariyana, Rajasthan, Himachal Pradesh and Madhya
Pradesh).

The project for the Management Training Segment(MTS) was “Credit Scoring Tool for New
Individual Loans” for MESO department for Individual Home and Business Loan. The Head
Office of MIMO is in Delhi and the reporting officer was Mr. Thirunavukkarasu. The study area
assigned was Saharanpur, Uttar Pradesh (West). This also happens to be the regional office (RO)
for six districts. The areas covered for the study were many parts of Saharanpur city and
Chuttmalpur. The duration for the study was two months, which was from 5 th of July to 3th of
September 2010.

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Credit Scoring
“A statistically derived numeric expression of a person's creditworthiness that is used by lenders
to access the likelihood that a person will repay his or her debts. It is a number between 30 and
85 - the higher the number, the more creditworthy the person is deemed to be”

Objectives of the study

 To understand working guidelines of credit process in the organization.

 To have a complete knowledge on existing credit scoring procedure.
 To develop credit scoring tool for individual lending for business and home loans.
 To prepare one user-friendly excel sheet with credit scoring components.
 To implement the credit scoring tool with the existing customer.

Advantages of credit scoring

 Ranking the customers based on their credit worthiness.

 Decide whether to extend credit & how much credit to extend
 Predict loan-default chances/ poor repayment
 Identify/isolate not so good customers
 Predict the future repayments
 Reduce individual biasness

The methodology adopted for the research was both qualitative and quantitative data collection
through questionnaire and personal interview with the existing clients in Saharanpur and nearby
areas. Then the data was analyzed and credit scoring tool was designed in MS Excel with the
mathematical formulae’s.

After completing the credit scoring tool for the MESO department for the Individual Business
Loan and Individual Home Loan it would be more convenient and easy for the credit executive
in particular to access the repayment capacity of the applicant and also as a part of the tool it has
been suggested the amount of loan to be given as per the applicants marks received. This would
save time on the part of the officer to estimate his/her (applicant) credit worthiness and also
increase the rate the loan could be disbursed. After the tool this would reduce the personal
biasness and every client would be treated on the same platform and also the client could get the
loan as per his/her credit worth.

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Acknowledgement:

It gives us immense pleasure when work comes to an end successfully. Our acknowledgements
are many times more than what we are expressing. We shall ever remain thankfully indebted to
all those known and unknown personalities, who have directly and indirectly encouraged us to
achieve our goal and enlightened us with the touch of their knowledge and constant
encouragement.

We would like to take this opportunity to duly acknowledge the contribution of a number of
people without whom the MTS-1 would not have been a successful exercise. We are thankful to
School of Rural Management, KIIT University for providing MTS project where we could
apply our theoretical knowledge during the study.

With immense pleasure, we express our profound sense of reverence and gratitude to Dr. L.K
Vaswani director KIIT School of rural management, BBSR for providing us with an opportunity
to work with MIMO Finance, a renowned name in Micro Finance based in Delhi.
This project reports marks the end of our Management Traineeship Segment (MTS) of MBA in
Rural Management in KSRM. We are grateful to our Reporting Officer as well as the Operations
Director of MIMO Finance Mr. Thirunavukkarasu at Delhi for offering us the opportunity to
work on “Credit Scoring Tool For New Individual Loan Products” project. Field research for
this paper was conducted at Saharanpur, U.P in July and August 2010. We would like to thank
MIMO for its willingness to participate in the study and to share the results. The openness and
responsiveness with which the staffs of MIMO worked with us contributed greatly to the depth
of the analysis. We wish to extend gratitude for the warm welcome we received from MIMO
staffs including our Reporting Officer as well as the Operations manager (Mr.
Thirunavukkarasu), area regional manager (Mr. Naresh Kumar), credit executive (Mr.
Narinder Kumar), branch managers and different clients at Saharanpur and for devoting their
precious time to providing valuable suggestions, guidance as well as their abiding inspiration
throughout the project period to accomplish the project work successfully. We take this
opportunity to express our deep sense of gratitude to all the staff members of Cluster offices
specially Mr. Satish and Mr. K.P Singh for their kind cooperation during our field visit.

We also thank our MTS coordinator Prof. Nandini Sen, our faculty guide Prof. Prasun Das and
all the faculty members of KSRM for their guidance and support in carrying out this project.

We have no words to express our feeling to those who blessed us from the depth of their heart,
provided tremendous encouragement, moral support and sacrificed all their comforts for the sake
of our academic achievements, they are our parents and land lord. . Last but not the least we
thank the ALMIGHTY for blessing us with enough patience, endurance and strength in
accomplishment of the endeavor.

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Table of Contents
Chapter – 1.................................................................................................................................................1
Introduction.................................................................................................................................................1
1.2 Rationale behind choosing the project:..................................................................................................2
1.3 Problem Statement:................................................................................................................................2
1.4 Research Objectives:.............................................................................................................................2
1.5 Limitations of the study:........................................................................................................................2
1.6 Highlights of credit scoring:..................................................................................................................3
1.7 Organizational Profile............................................................................................................................3
1.7.1 Organization History:.........................................................................................................................3
1.7.2 Vision:................................................................................................................................................3
1.7.3 Mission:..............................................................................................................................................4
1.7.4 Areas of Operations of MIMO:...........................................................................................................4
1.7.5 Organization Structure:.......................................................................................................................5
1.7.6 Competitors of MIMO in Saharanpur:................................................................................................5
1.8 Benefits of credit scoring:......................................................................................................................6
1.9 Advantages of credit scoring:................................................................................................................6
Chapter - 2.................................................................................................................................................7
Methodology...............................................................................................................................................7
2.1 Study Area.............................................................................................................................................7
2.2 Type of Data..........................................................................................................................................7
2.3 Techniques of data collection................................................................................................................7
2.4 Study period..........................................................................................................................................7
2.5 Sample size............................................................................................................................................7
2.6 Steps for doing project:..........................................................................................................................8
2.7 Process for credit scoring project:..........................................................................................................9
Chapter – 3...............................................................................................................................................10
Literature Review......................................................................................................................................10
Types of Credit Scoring Model.................................................................................................................11
Chapter - 4...............................................................................................................................................14
Findings and Discussion............................................................................................................................14
4.1 List of documents required before the loan is provided.......................................................................14
4.2 Proposed Loan Process........................................................................................................................14

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4.3 Financial analysis:...............................................................................................................................15
4.4 Technical Analysis:.............................................................................................................................16
Chapter- 5................................................................................................................................................17
Case Study.................................................................................................................................................17
5.1 Personal Details...................................................................................................................................17
5.2 Personal Details...................................................................................................................................19
Chapter – 6...............................................................................................................................................21
Conclusion & Recommendations..............................................................................................................21
6.2 Recommendations for loan amount.....................................................................................................21
6.2.1 Recommendation for the policy........................................................................................................21
6.3 Important guidelines............................................................................................................................21
Annexure - 1: Questionnaire......................................................................................................................22
For business loan.......................................................................................................................................22
For Home loan...........................................................................................................................................24
Annexure – 2: Document Checklist cum Sequence of Documents............................................................26
Annexure – 3(Parameters and Sub parameters for Home Improvement Loan)..........................................27
Annexure – 4(Parameters and Sub parameters for Home Rental Loan).....................................................28
Annexure – 5(Parameters and Sub parameters for Business Loan)............................................................29
Annexure – 6 : Score card of Home Improvement Loan...........................................................................30
Annexure – 7: Score card of Home Rental Loan.......................................................................................31
Annexure – 8: Score card of Business Loan..............................................................................................32
Annexure 9: Tool test Results....................................................................................................................33
Reference:..................................................................................................................................................34

List of Figures
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Figure 1: Map of Areas of operations..........................................................................................................4
Figure 2: Structure of MESO.......................................................................................................................5
Figure 3: Tool Testing Results..................................................................................................................33

List of Flow Charts

Flow Chart 1: Steps for doing project..........................................................................................................8

Flow Chart 2: Process for Credit Scoring....................................................................................................9
Flow Chart 3: Proposed Loan Process.......................................................................................................14
Flow Chart 4: Mathematical model used for the tool.................................................................................16

List of Flow Charts

Table 1: Organizational Structure................................................................................................................5

Table 2 :Checklist cum Sequence of Documents.......................................................................................26
Table 3: Parameters and Sub parameters for Home Improvement Loan....................................................27
Table 4: Parameters and Sub parameters for Home Rental Loan...............................................................28
Table 5: Parameters and Sub parameters for Business Loan......................................................................29
Table 6: Score card of Home Improvement Loan......................................................................................30
Table 7: Score card of Home Rental Loan.................................................................................................31
Table 8: Score card of Business Loan........................................................................................................32

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Glossary:
JLG – Joint Liability Group

MEL – Micro Enterprise Loan

NBFC - Non-Banking Financial Company

CEO – Chief Executive Officer

COO – Chief Operational Officer

BL – Business Loan

HL – Home Loan

DL – Dairy Loan

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 Chapter – 1
Introduction

1.1 Background of the project:

Credit scoring is used throughout the world to process many types of small-value loan
transactions. It has been applied most widely and successfully for personal credit cards and
consumer and mortgage loans. Repayment risk for these products is closely linked to verifiable
factors such as income, credit bureau information, and demographic factors such as age,
education, and homeowner status. More recently, credit scoring has been used to evaluate loans
to small and micro businesses, but even in the most developed financial markets, credit scoring
for small business loans generally works in conjunction with a judgmental process rather than as
an independent decision-making tool.

Credit scoring systems help to:

 Streamline the lending process

 Improve loan officer efficiency
 Increase the consistency of the evaluation process
 Reduce human bias in the lending decision
 Enable the bank to vary the credit policy according to risk classification, such as
underwriting or monitoring some lower risk loans without on-site business inspections
 Better quantify expected losses for different risk classes of borrowers
 Reduce time spent on collections, which in some markets claim up to 50 percent of loan
officers’ time.

One conceptual difficulty with embracing credit scoring for microfinance is that a data-driven
business approach does not intuitively seem like a good fit for reaching data-poor clients who
have been typically excluded by banks. Some examples of data limitations in the microfinance
field are:

 The self-employed poor frequently cannot document income and credit history
 Small businesses purposefully misstate tax accounting statements, particularly profit, to
reduce their tax burden
 Microfinance borrowers are rarely included in credit bureaus, or credit bureaus
themselves are underdeveloped in many markets.

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1.2 Rationale behind choosing the project:
 The existing clients are only offered JLG loans by MIMO and the other companies.
 To take one step ahead MIMO is now providing individual loans (business loan, home
loan, microenterprise loan and diary loan).
 Hence, the credit tool we have designed would help them (MIMO) to assess the
repayment capacity of the individual & also reduce the risk involved in the repayment on
the loan distributed.

1.3 Problem Statement:

 Till date the organization was using a tool which was designed specifically for
microenterprise loans (MEL), which was designed for JLG model. So, there were few
parameters and sub parameters which were not applicable for an individual and here is
where they lost their marks in the grading tool and hence they were not eligible for the
loan.
 Another problem that prevailed was that due to lack of credit tool personal biasness was
generally indulged in the process of loan distribution.

1.4 Research Objectives:

 To understand how an MFI/NBFC functions

 To understand the working environment in the organization.
 To have a complete knowledge of the credit scoring tool and its implementation.
 To identify credit-worthy customers
 To develop credit scoring tool for business lending and home loan.
 To put my knowledge on excel to actual implementation

1.5 Limitations of the study:

 The study has only been conducted in Saharanpur and its neighboring areas but it is made
for the entire operation of Memo Finance(the entire Area where it operates)
 The number of clients available for the “Business Loan” were less in number as this is a
newly launched product.
 The parameters and sub parameters on the basis of individual observations were
developed out of individual limited knowledge

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1.6 Highlights of credit scoring:
 Better assess the repayment capacity of the client
 Reduce the number of defaults
 Reduce individual biasness
 Process data quickly and inexpensively
 Reduce risk and increase efficiency of recovery process

1.7 Organizational Profile

1.7.1 Organization History:

 2007: Shah Sandhu Finance (NBFC) was acquired by Manab Chakraborty (Promoter) &
Bellwether MF Fund

 2008: Change of company name to Mimoza Enterprises Finance (Mimo Finance)

 2009: Silver Certificate for reporting on Social Indicators to MIX Market awarded
(CGAP, Michael & Susan Dell Foundation, Ford Foundation & MIX Market)

 CRISIL awarded a rating of MF4 (1-8 scale); top rating received by early stage MFIs in
India

Mimoza Enterprises Finance Co. Pvt. Ltd. (NBFC) offers its microfinance products under
the MIMO Finance brand. Through microfinance, they create sustainable sources of income
for women, which enables them to fulfill their greater corporate mission to help families
obtain health care, access to education, and the empowerment necessary to make choices
that best serve their needs.

Having established MIMO’s operations in Uttarakhand, they now operate across the various
states of North India. Specifically, they have established regional hubs and branch offices in
urban and peri-urban areas along the major highways and towns in Uttarakhand, Uttar
Pradesh, Haryana, Rajasthan, Himachal Pradesh and Madhya Pradesh. The present time is
an exciting one for MIMO, as MIMO continuously look to take advantage of the myriad
expansion opportunities that present themselves in the North Indian "Hindi Belt."

As of 31st March 2010 they have 52,345 active loan clients. They have disbursed 102,138
loans in total.

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1.7.2 Vision:
 To reach One million households in India by 2015.

1.7.3 Mission:
To strengthen the economic capacity of urban and rural micro and small business operators
to ensure their economic self-reliance.

1.7.4 Areas of Operations of MIMO:

 Uttarakhand
 Uttar Pradesh
 Madhya Pradesh
 Himachal Pradesh
 Haryana
 Rajasthan

Figure 1: Map of Areas of operations

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1.7.5 Organization Structure:
Table 1: Organizational Structure

Name of the person Designation

Manav Chakravorty C.E.O
Swaminathan A. Aiyar Journalist and Angel Investor of MIMO Finance
R. Venkatram Reddypally Nominee Director of the Bellwether Microfinance Fund
and Angel Investor of Mimo Finance
Murli Shrinivas C.O.O
R.Thirunavukkarasu Operations Director
Dr. Rahul Kumar C.F.O
Mohd. Jeena HR and Training Manager
Sandeep Mahajan Internal Auditor
Ankit Bukharia MIS Head

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Figure 2: Structure of MESO
BUSINESS HEAD

Sales and Recovery Dept. Credit Appraisal Dept.

GM Sales GM Credit

Sales Manager Credit Manager

Unit Manager (UM) Credit Exec. /Asst.

Meso Loan Officer Recovery Officer Verification Officer

1.7.6 Competitors of MIMO in Saharanpur:

 Fusion Bank
 SKS
 Basix
 Ujeevan
 Bandhan
 Sonata
 Disha (SHG)
 Suvidha(Individual)
 Share

1.8 Benefits of credit scoring:

Scoring can help credit grantors keep pace with various changes in the market place, while
providing the following benefits to impact their business -

 Speed - cut response time from days to minutes so that credit grantors can respond
quickly to their customers
 Efficiency - manage growth, manage staffing levels and automate their decision policy
 Minimize risk - maintain high approval levels, reduce bad debt and better manage credit
portfolios
 Consistency - reduce training time, achieve consistent policy and provide consistent
explanations
 Maximize sales - identify those customers who have financial strength to handle
increased credit limits

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1.9 Advantages of credit scoring:
Advantages

 To predict the likelihood of losing valuable customers

 To decide whether to extend credit & how much credit to extend
 To predict loan-default chances or poor repayment behaviors.
 To identify/isolate bad customers
 To predict the future payment behavior
 Reduce individual biasness

Chapter - 2
Methodology

2.1 Study Area

Saharanpur is a city and a Municipal Corporation in the state of Uttar Pradesh in northern
India. It is the administrative headquarters of Saharanpur District as well as Saharanpur
Division. Saharanpur is internationally famous for its wood carving work cottage industry. It
is a thriving market of local agricultural produce, including basmati rice and mangoes. A
variety of agro-based industrial enterprises such as textiles, sugar, paper and cigarette
factories are located in it. Our field covered Shakh pura, Chipyan, Chak Devli, Noor Basti,
Rakesh Takis, Sadakdudhli, Kailashpur, Mohajampura, Mahaswari and,Chak Harati.

2.2 Type of Data

The data we had to collect was qualitative as well as quantitative.

2.3 Techniques of data collection

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 The various ways and means of collection of data was via a questionnaire, personal
interview with the potential clients and existing clients, discussion with the staff of MIMO,
and close observation along the entire stay. The project allotted required more of desk work
as this was for the organization and had to full fill their expectation, so there was lot of
redoing of the tool.

2.4 Study period

The entire study duration was of two month dated 6th July to 3rd of September.

2.5 Sample size

A sample of 15 from both business loan and home loan was taken.

2.6 Steps for doing project:

Flow Chart 1: Steps for doing project

Field visits (two days)

Prepared scope and timeline for the project

Preparation of questionnaire

Visiting to the clients and analysis

Collection of data by interviewing the clients

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 Analysis of data

Prepared the credit scoring tool for both home loan and business loan

Testing of the tool

Preparation of report

First we visited to the clients in Saharanpur as it was easy for us to collect data. Then scope and
time line were prepared for the project. Then we prepared questionnaires for both home loan and
business loan. Then we went to the clients and data were collected through the questionnaire and
personal interview with the clients. Then data analysis was done. After the analysis of data we
prepared credit scoring tool for home loan and business loan. Then report was prepared.

2.7 Process for credit scoring project:

Flow Chart 2: Process for Credit Scoring

Questionnaire

Collection of quantitative and qualitative data

through personal interview with existing clients

Analysis of data

Decide parameters and sub-parameters for designing credit scoring

tool

Credit scoring tool designing through

MS Excel
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 Testing of the tool

Chapter – 3
Literature Review

“A statistical technique used to determine whether to extend credit (and if so, how much) to a
borrower. Credit scoring is often considered more accurate than a qualitative assessment of a
person's credit worthiness, since it is based on actual data. When performing credit scoring, a
creditor will analyze a relevant sample of people (either selected from current debtors, or a
similar set of people) to see what factors have the most effect on credit worthiness. Once these
factors and their relative importances are established, a model is developed to calculate a credit
score (a number indicating how credit-worthy the applicant is) for new applicants. The officer
inputs applicant-specific information for each variable in the model, and can thus find out how
credit-worthy he/she is. Developing a credit scoring model is usually a time-consuming,
complicated process given that creditors often have to look at a large sample and consider many
different variables. Thus, these models are usually developed at the firm level as opposed to the
individual credit office level. Some of the factors considered when developing a credit scoring
model are outstanding debt, the number of credit accounts maintained, age, income, credit
history, etc. As required by the Equal Credit Opportunity Act, a credit scoring model cannot
consider race, sex, marital status, national origin, or religion. If age is considered, the analysis
should be such that older people are given equal consideration in a credit application”

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 (Source: InvestorWords.com)

“A statistically derived numeric expression of a person's creditworthiness that is used by lenders

to access the likelihood that a person will repay his or her debts. A credit score is based on,
among other things, a person's past credit history. It is a number between 300 and 850 - the
higher the number, the more creditworthy the person is deemed to be”

(Source: www.investopedia.com)

Types of Credit Scoring Model

Credit score assures the credit worthiness of the consumer. There are basically two types of
credit scoring models. One is Statistical Scoring Model and the other is Judgmental Scoring
Model.

Judgmental Scoring Model: A judgmental scoring model is primarily based on traditional

standards of credit analysis. Judgmental Scoring Model considers factors like bank and trade
references, payment history, credit bureau ratings and financial statement ratios to produce the
total credit score of the individual. Judgmental scoring model is comparatively easier to interpret
and is almost free from ambiguity.

Statistical Scoring Model: Statistical model works in almost the same way as judgmental model.
Statistical model considers many factors at the same time. This model analyzes multivariate (any
procedure which involves two or more variables) correlation (A reciprocal relation between two
or more things) to assign statistically derived weights used in the model. The factors are
normally obtained from individual's credit files and also from the credit bureau reports.
Statistical Scoring Model can also be described in terms of a scorecard, a pooled scorecard, and a
custom scorecard. A scorecard applies data from one firm, whereas a pooled scorecard applies

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data from more than one firms and a custom scorecard mixes the data acquired from both the
statistical model and judgmental model.

A Laundry list of Microfinance Client Characteristics

 Demographics: gender, year of birth, marital status, highest education
 Household information: number of people in household
 Household Assets: homeowner status, years at a residence, number of rooms, vehicles
owned
 Business Demographics: sector, type of business, years in business, number of employees
 Financial Flows: business revenue, household income, rent payment
 Balance Sheet: total assets, total liability(formal debt, informal debt),total equity
 Repayment History: number of loans, longest spell in arrears, days in arrears per
installment
 Credit Bureau Information: bureau score, presence on “Blacklist”
 Quantified Subjective Judgments: managerial skills, cash-flow variability, business
prospects
 Loan Characteristics: amount requested, type of loan, borrower’s contribution to
financing
(Source: Schreiner, 2003)

The approximate makeup of the FICO score used by U.S. lenders

Credit scores are designed to measure the risk of default by taking into account various factors in
a person's financial history. Although the exact formulas for calculating credit scores are closely-
guarded secrets, FICO has disclosed the following components and the approximate weighted
contribution of each:

* 35% — Payment History – Late payments on bills, such as a mortgage, credit card or
automobile loan, can cause a consumer’s FICO score to drop. Paying bills as agreed over time
will improve a consumer’s FICO score.

* 30% — Credit Utilization – The ratio of current revolving debt (such as credit card balances)
to the total available revolving credit (credit limits). Consumers can improve their FICO scores
by paying off debt and lowering their utilization ratio. Alternatively, applying for and receiving
the credit limit increase will also drive down the utilization ratio. Closing of existing revolving
accounts will typically adversely affect this ratio and therefore have a negative impact on their
FICO score.

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 * 15% — Length of Credit History – As consumer’s credit history ages, assuming they pay
their bills, it can have a positive impact on their FICO score.

* 10% — Types of Credit Used (installment, revolving, consumer finance, mortgage) –

Consumers can benefit by having a history of managing different types of credit.

* 10% — recent search for credit and/or amount of credit obtained recently – Multiple credit
inquiries for a consumer seeking to open new credit, such as credit cards, retail store accounts,
and personal loans, can hurt an individual’s score. Applying for lots of new credit in a short
period of time is also viewed as risky and can cause a drop in an individual’s score. However,
individuals shopping for a mortgage or auto loan over a short period will likely not experience a
decrease in their scores as a result of the types of inquiries.

Credit scores are not the sole underwriting factor used by lenders. Lenders use their own internal
scoring models as well as other loss mitigation tools and data to gauge an individual's
creditworthiness.[16] For instance, current income and employment history, which are not part
of a score, are weighed when applying for credit, along with tenancy status (rent or own) in some
cases. An unemployed individual with no sources of income will not usually be approved for a
home mortgage, regardless of his or her FICO scores.

There are other special factors which can weigh on the FICO score.

* Any money owed because of a court judgment, tax lien, or similar carry an additional
negative penalty, especially when recent.

* Having one or more consumer finance credit accounts may also carry a negative weight
(critics say that this causes a vicious cycle, locking people into continuing to use consumer
finance companies).

* The number of recent credit checks for consumers seeking new credit, such as credit cards or
retail store cards, can have a negative impact on the FICO score. However, for consumers
shopping for a home or a car, credit inquiries generated for those activities are grouped together
as one credit inquiry, and therefore, these inquiries do not impact a consumer’s score.

* While all credit inquiries are recorded and displayed on your credit report for a period of
time, credit inquiries that were made yourself (to check your credit), by your employer (for
employee verification) or by companies initiating prescreened offers of credit or insurance do not
have any impact on your credit score.
(Source: FICO, www.fico.com)

Credit scoring uses quantitative measures of the performance and characteristics of past loans to
predict the future performance of loans with similar characteristics. For lenders in rich countries

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in the past decade, scoring has been one of the most important sources of increased efficiency.
Lenders in rich countries, however, score potential borrowers based on comprehensive credit
histories from credit bureau and on the experience and salary of the borrower in formal wage
employment. Most microfinance lenders, however, do not have access to credit bureau, and most
of their borrowers are poor and self-employed. The two chief innovations of microfinance—
loans to groups whose members use their social capital to screen out bad risks and loans to
individuals whose loan officers get to know them well enough to screen out bad risks—rely
fundamentally on qualitative information kept in the heads of people. Scoring, in contrast, relies
fundamentally on quantitative information kept in the computers of a lender. Can microfinance
lenders use scoring to cut the costs of arrears and of loan evaluations so as to improve efficiency
and thus both outreach and profitability? Experiments in Bolivia and Colombia (Schreiner 2000,
1999a, 1999b) suggest that scoring for microfinance can indeed improve the judgment of risk
and thus cut costs. For example, scoring may save a Colombian microfinance lender about
$75,000 per year (Schreiner, 2000). In present value terms, this approaches $1 million. Scoring is
probably the next important technological innovation in microfinance, but scoring will not
replace loan groups or loan officers, and it will never be as effective as it is in rich countries
because much of the risk of microloans is unrelated to characteristics that can be quantified
inexpensively. Still, scoring can still be useful in microfinance because some risk is related to
characteristics that are inexpensive to quantify, and current microfinance technologies do not
seem to take advantage of this as much as they could. This paper describes how scoring works,
what it can and cannot do, and how microfinance lenders should prepare themselves to
implement it. Other good, general introductions to scoring are Mays (1998), Hand and Henley
(1997), Mester (1997), Viganò (1993), and Lewis (1990).

Chapter - 4
Findings and Discussion

4.1 List of documents required before the loan is provided

 Application personal detail
 Social &Economic detail
 Photo ID for main applicant
 Residence proof
 House ownership document
 Bank/Informal saving passbook
 Guarantor photo ID
 Security checks
 Telephone Bill/ Electricity Bill
 LPG Connection Bill

14 | P a g e
.,g
fi
v
O
V
ti
x
)
E
C
l(
T
w
f
p
H
ft
A
IS
M
ffi
k
B
o
m
F
q
c
n
a
h
t
e
r
u
b
is
d
&
4.2 Proposed Loan Process
(Flow Chart 3: Proposed Loan Process)

VOCvisits
Credit
the
Tool
client
Back
the
E
Sales
Finance
After
for
applies
Sales
BH
identifies
the field
Officer
Officerfills
sends
appraisal
approves
Scoring
loan application
cheque
MISforwards
enters
(CST)
andthrough
sends to
application
office
branch
Verification
visits and
&
potential
data,
and
to
field
sends
tofor
4.3 Financial analysis:
Disapprove

It is the duty of the credit executive to generate grades out of the credit tool and once the form is

officer
filled by the field staff, the credit executive is the one who verifies the validation of the

forwards to
information provided in the form and only after his approval, the form is passed onto the senior
authority for actual sanction of the loan. The tool itself generates the rating of the person.

demand
Credit Executive
to Finance.
disbursement.
Effects on the profits:

references.
(VO)
Rejecting “High Risk” case means:

Business (CE) Head

Avoiding some “Bad” (Benefit)

Losing some “Good” (Cost)

Cost of giving loan to 1 “Bad” client worth losing profits of 5 “Good” clients.

For e.g.: Take a case

Suppose the company give loan to a “good” client = Rs.30,000@20% for 1 year

Then the company will be profited by Rs.6,000, that is the “good” client will repay Rs.36,000.

15 | P a g e
Now, suppose the company give loan to a “bad” client = Rs.30,000

Then there is no chance to recover the disbursed loan from the “bad” client.

That is the company will bear the loss of 5 “good” clients (5*Rs.6,000 = Rs.30,000)

“Hence, the benefit of a credit tool can be easily seen”.

This tool will generate a grade depending upon savings, family details, income and expense,
credit worthiness, business information, housing details, repayment history and reference check,
which would help to evaluate the client’s creditworthiness and minimize the risk and loss arising
from the loan. Prior to the use of this tool the organization was using the Micro Enterprise Loan
(MEL) tool which didn’t give specific details of the clients business and housing details in
particular it was more of tool for the manufacturing units and failed to cater the other units.
Hence the tool is a more specific tool for the organization and the organization can now clearly
identify the not so good customers. The tool also suggests the amount of loan recommended for
the client depending upon the credit rating received after entering the details in the tool. The low
rating received of the tool means that the client has a low repayment capacity as per the various
parameters; it is basically predicting loan-default chances or estimating the future repayments.

4.4 Technical Analysis:

The model is technically sound as after preparation of the model, the model was verified by
entering data of the existing clients and the grades achieved was either A or B, which meant low
risk and regular.

Flow Chart 4: Mathematical model used for the tool

16 | P a g e
 Parameters and Sub-parameters

Give weightage to parameters and sub-

parameters

Give ratings for sub-parameters through

1 to 5(1 is for worst and 5 is for best)

Enter values (from a list of options for

sub-parameters)

Get the achieved score by some formulae

related to the entered values

Get the total score out of 100

If the total score is >80 If the 40<total score<60

Grade A (Low Risk) Grade C (Risky)

If the 60<total score<80 If the total score is <40

Grade B (Regular) Grade D (High Risk)

17 | P a g e
 Chapter- 5
Case Study

5.1 Personal Details

Name :Kusnuma
Year of Birth: 1982 (28 years)
Education: Illiterate
Marital Status: Married
Husband name :Sharafat

Location
Address: Noor Basti
Branch: Beribag, Saharanpur

Business Details
Type of Business: Tailoring and Tea Shop
Year of start of business: 3 years back
Peak season: Throughout year
Lean season: No
Income from business per month: Rs. 3000 from Tailoring and Rs. 6000 from Tea shop
Transaction mode: Cash
Property of Business: Owned
Assets owned: 1) Sewing machine (1)
Book of accounts: Not maintained
Margin in business: 50%
Saving: 25%

Present Credit History

Credit institution: MIMO Finance
Amount: Rs. 12,000
Purpose: Expansion of business
Repayment up to present: no installment paid(new loan)

Previous Credit History

Credit institution: MIMO Finance
Amount: Rs. 6,000 (JLG loan)
Purpose: Expansion of business
Repayment up to present: Paid
18 | P a g e
Credit Worthiness:
References/ Guarantors: Available
Bank Account: Not Available

Loan Requirement:
Purpose of loan: Business expansion (more inventories)
Loan amount: Rs. 20,000 - Rs. 30,000
Preferred frequency of installment: Monthly
Loan tenure preferred: 18 months

STORY

Kusnuma is engaged in Tailoring & her husband is engaged in “Tea shop” since 3 years. Earlier
her business was not growing. But after getting JLG loan from MIMO Finance, her business
started growing at a faster rate. She has got loan from MIMO Finance twice & invested in the
business. Kusnuma and her husband’s business run throughout the year. She has one sewing
machines & her husband has a tea shop as assets of their business. Her husband was working as a
worker in another tea shop. Previously she had taken loan for buying of sewing machine and
now she has taken loan to start their own tea shop. She gets Rs.50/sewing of one salwar suit and
she normally stitches two to three suits per day. So, she earns Rs.100 – Rs.150 per day and her
husband is getting Rs.200 from the tea shop. They have a joint family and don’t have a self
owned house. There are times wh en she is out of work due to no order but these type of days are
very few. Her business incurs 50% margin & 25% saving. As she has earlier good relationship
with MIMO Finance, so she is seeking for micro-enterprise loan of Rs. 30,000 from MIMO to
expand the business. She would have liked more money and believes “more money, more
business, & then more customers”. She trusts MIMO and thinks women who create businesses
with the loan get more respect and can manage more “low times”. In future she plans to take out
micro-enterprise loan to expand her business & to keep pace with time.

19 | P a g e
5.2 Personal Details
Name: Nushrat
Year of Birth: 1963 (47 years)
Education: 10th passed
Marital Status: Married
Husband name: Md. Ali
Children: 2 (1 son & 1 daughter)

Location
Address: Noorbasti
Branch: Beribag, Saharanpur

Business details
Type of Business: Dairy
Year of start of business: 2005
Peak season: Throughout the year
Lean season: No
Income from business per month: Rs. 30,000 – Rs. 35,000
Transaction mode: Cash
Property of Business: Owned
Assets owned: Two cows and one buffalo
Book of accounts: Not maintained
Margin in business: 20 -25%
Saving: 30%

Present Credit History

Credit institution: MIMO Finance
Amount: Rs. 12,000
Purpose: Expansion of business
Repayment up to present: no installment paid

Previous Credit History

Credit institution: MIMO Finance
Amount: Rs. 6,000 (JLG loan)
Purpose: Expansion of business
Repayment up to present: Paid

STORY
20 | P a g e
Nushrat at Saharanpur represents determination. She is standing on her own feet. She was
brought up in family of 3 brothers & 2 sisters. Later she got married. Her husband was engaged
in a paper mill factory. After sometimes, she gave birth to a boy baby and two year later she gave
birth to a girl baby. Their family was running smoothly. One day while coming from the factory
her husband met with an accident and lost his right leg. As he was the only earning member of
her family, it was difficult to survive as her husband was unable to work. Then she came to know
about Mimo and took a loan of Rs.6000 to buy a cow. Then she started the milk business by
selling the milk produced from the cow. As she told the first month of the business was so
difficult to maintain, but after few months she was able to maintain the business properly. The
business was running successfully. She sold the milk by Rs.25 to Rs.30 per liter and the cow
gave 8 to 9 liters of milk per day in two shifts. In this way her monthly income became Rs.5000
to Rs.6000. After two months, she was able to buy another cow and continued her business
successfully. Her business keeps on growing. MIMO came to know her determination towards
her business & gave her a loan of Rs. 12,000. Now with the help of money, she bought another
buffalo and now her income increased by 3 times. Now she sells the milk to wholesaler. Now her
business is growing at a much faster pace. She is now economically independent and fulfilling
her dreams.

21 | P a g e
 Chapter – 6
Conclusion & Recommendations

6.1 Conclusion
After completing the credit scoring tool for the MESO department for the Individual Business
Loan and Individual Home Loan it would be more convenient and easy for the credit executive
in particular to access the repayment capacity of the applicant and also as a part of the tool it has
been suggested the amount of loan to be given as per the applicants marks received. This would
save time on the part of the officer to estimate his/her (applicant) credit worthiness and also
increase the rate the loan could be disbursed. After the tool this would reduce the personal
biasness and every client would be treated on the same platform and also the client could get the
loan as per his/her credit worth.

6.2 Recommendations for loan amount

The loan amount should be given as per the score received in the tool for future when the loan
amount increases.

6.2.1 Recommendation for the policy

 Loans should be given even to unmarried people (whose business is running sound)
 A small loan (say Rs. 10000/-) should be given to people with sound business plan and
appears to have a sound repayment history.
 Reduce the number of formalities required to get the loan and also a guarantor as it gets
very difficult for the client to produce them.

6.3 Important guidelines

 Please keep the original copy of the tool safely as damage to it in any form means loss of
the entire tool
 Data in reference sheet should not be altered during filling up the tool

22 | P a g e
Annexure - 1: Questionnaire

For business loan

Applicant Name: __________________

 Borrower Monthly Gross Income in 2009

 Borrower Occupation
 Cash flow (detailed income & detailed expenditure)
 Pre and post position of the family and business after the loan
 Adult person income generation (no minor income to be taken individually it is to be
clubbed in the family income)
 Bank account details
 Income of the family
 No of Business transactions per day(in Rupees)
 Permanent address of business
 List of creditors n debtors(above Rs.1000/-)

Property Information

 Type of Property(owned or rented)

 Condition of the property
 Assets present value (house and the other assets)
 How many years have you been staying in this house

Family details

 Family size
 Earning members
 Age of the working member
 Dependents
 Adults in the family
 Physical health of the members of the family

Expenses

 Groceries Monthly Expense

 Utilities Monthly Expenses
 Cell Phone Monthly Expense
 Electricity expenses
 MISC. Expenses

23 | P a g e
Savings

 Monthly savings
 Repayment weightage based on the savings
 Duration of saving?

OTHERS

 Any other loan taken from memo?

 Any default in repayment?
 Personal behavior (to be accessed)?
 No. of adults into permanent job?
 Do you maintain books of accounts?
 What is the loan amount that you require?

Business details

 No. of machines (in case of hosiery)

 Business experience
 Business cycle (inventory)
 Bank accounts (number)
 Does your business primarily serve local customers, local businesses, state-owned
enterprises or foreign markets?
 Are any of the owners of this business a woman?
 Compared to last year, has the number of employees in your firm increased, decreased or
stayed the same?
 Compared to last year, has your company earnings increased, decreased or stayed the
same?
 What is the primary payment method you use in purchasing goods and services for your
business?
 Do you have a landline and electricity connection at business?

24 | P a g e
For Home loan
Applicant Name: __________________
 Borrower Monthly Gross Income in 2009
 Borrower Occupation
 Cash flow (detailed income & detailed expenditure)
 Pre and post position of the family and business after the loan
 Adult person income generation (no minor income to be taken individually it is to be
clubbed in the family income)
 Bank account details
 Income of the family
 No of Business transactions per day(in Rupees)
 Permanent address of business
 List of creditors n debtors(above Rs.1000/-)

Property Information

 Type of Property
 Condition of the property
 Property Occupied by
 Assets present value (house and the other assets)
 How many years have you been staying in this house?

Family details

 Family size
 Earning members
 Age of the working member
 Dependents
 Adults in the family
 Physical health of the members of the family

Expenses

 Groceries Monthly Expense

 Utilities Monthly Expenses
 Cell Phone Monthly Expense
 Electricity expenses
 MISC. Expenses

25 | P a g e
Savings

 Monthly savings
 Repayment weightage based on the savings
 Duration of saving?
 Do you maintain books of accounts?

OTHERS

 Any other loan taken from MIMO?

 Any default in repayment?
 Personal behavior (to be accessed)?
 Bank accounts?(detail)
 No. of adults into permanent job

26 | P a g e
Annexure – 2: Document Checklist cum Sequence of Documents
Table 2 :Checklist cum Sequence of Documents

Product (BL / MEL / DL /HL)

Name of App & Co-App
Pre Appraisal Documents
Sr. No. Document Yes / No
1 Document Check list  
2 Application Form (App. & Co-App. with Joint Photos)  
3 Socio Economic Details  
4 Income Expense Sheet  
5 Customer Authorization Letter  
6 Vernacular Form  
7 Vendor verification Form (In Case of BL / MEL)  
8 ID Proof (Applicant)  
9 ID Proof (Co-Applicant)  
10 Residence Proof (App/ Co-App.)  
11 House Ownership Proof  
12 DPN (Signed & Stamped)  
13 Security Cheques 4  
14 Bank Statement/ Passbook (App or Co-App)  
15 Previous Track record (If any)  
16 Guarantor Information Form (With Photograph)  
17 ID proof (Guarantor)  
18 Residence Proof (Guarantor)  
19 House Ownership Proof (Guarantor)  
20 Road MAP  
Signature of Sales Officer
Post Approval Documents
1 Appraisal Sheet  
2 PD Sheet (In Case of BL / MEL / DL)  
3 Scoring Tool  
4 Photographs of Business / Setup/ HL  
5 Approval Mails  
Signature of Appraisal Officer
Post Disbursal Documents
1 Agreement Set (App & Co-App)  
2 Agreement Set (Guarantor)  
3 Insurance & PF Receipt  
4 Loan Disbursement Sheet  
5 Loan Utilization Report  
Signature of MIS Assistant

27 | P a g e
Annexure – 3(Parameters and Sub parameters for Home Improvement Loan)

Table 3: Parameters and Sub parameters for Home Improvement Loan

Parameters Subparameters
Family details Family size
  Dependents
Occupation detail Occupation
  Stability in business/service
  No. of adult earning members
  Electricity
  Area of house
  No. of Rooms
  Present Condition of home
  Personal contribution of client
  House Registration
  Loan for type of improvement
  Ownership of house
  Stability in current house
  Availability of toilet
  Market Value of the house
  Type of house
Repayment History No. of loans repaid
  Timely repayment
  current liability(EMI)
  no. of installment delay
  no of cheques bounced
Two neighbors opinion about the client(in terms
Reference checks of financial position)
  Behavior/attitude
Others Present market value of all other assets
  Bank account
  Monthly saving

28 | P a g e
Annexure – 4(Parameters and Sub parameters for Home Rental Loan)

Table 4: Parameters and Sub parameters for Home Rental Loan

Parameters Subparameters
Family details Family size
  Dependents
Occupation detail Occupation
  Stability in business/service
  No. of adult earning members
Housing Details Electricity
  Area of the house
  No. of Rooms
  Personal contribution of client
  Previously rented out rooms
  Availability of tenants
  House Registration
  Ownership of house
  Stability in current house
  Rent(to be received after the loan)
  Accessibility to market
  Type of house
  Market value of house
Repayment History No. of loans repaid
  Timely repayment
  current liability(EMI)
  No. of installments delayed
  No. of cheques bounced
Reference checks Neighbors opinion about the client
  Behavior/attitude
Others Present market value of all other assets
  Type of Bank account
  Monthly saving

29 | P a g e
Annexure – 5(Parameters and Sub parameters for Business Loan)

Table 5: Parameters and Sub parameters for Business Loan

Parameters Subparameters
FAMILY DETAILS Family size
  Number of adult earning members
  Dependents
BUSINESS INFORMATION Number of years in a current business
  Present market value of the shop
  Peak season
  Value of the assets in the shop
  Number of transactions per day(in Rs.)
  Purchasing pattern
  Sales pattern
  Number of employees compared to last year
  Business profit margin(Net)
  No. of suppliers
  No. of buyers
  No. of present employees
  Ownership
  Type of business
  Business registration
  Monthly turnover
  Average monthly profit
  Average stock
  Locality of business
  Arrangement of shop
  If home and shop are same
  Do you maintain books of accounts
  Secondary Business
  Shop Insurance
Repayment History No. of loans repaid
  Timely repayment
  current liability(EMI)
  no. of installment delay
  no of cheques bounced
Reference checks Neighbors opinion about the client
  Vendors opinion about the client
  Behavior/attitude
Others Present market value of all other assets
  Bank account

30 | P a g e
   Monthly saving

Annexure – 6 : Score card of Home Improvement Loan

Table 6: Score card of Home Improvement Loan

Max Achieved Max Score

Parameters score score Sub parameter score Achieved
Family details 3 0.8 Family size 2 0.4
      Dependents 1 0.4
Occupation
detail 10 6.8 Occupation 4 3.2
      Stability in business/service 3 0.6
      No. of adult earning members 3 3
Housing Details 45 36.2 Electricity 3 3
      Area of house 5 3
      No. of Rooms 3 1.8
      Present Condition of home 4 2.4
      Personal contribution of client 6 3.6
      House Registration 2 0.4
      Loan for type of improvement 4 4
      Ownership of house 3 3
      Stability in current house 5 5
      Availability of toilet 3 3
      Market Value of the house 4 4
      Type of house 3 3
Repayment
History 24 24 No. of loans repaid 7 7
      Timely repayment 4 4
      current liability(EMI) 4 4
      no. of installment delay 5 5
      no of cheques bounced 4 4
Reference Neighbors opinion about the
checks 6 6 client 3 3
      Behavior/attitude 3 3
Present market value of all other
Others 12 12 assets 3 3
      Bank account 2 2
      Monthly saving 7 7

Total Score 100 85.8 Low risk,Reward,recommend amount of loan Rs.30,000

    Grade A

31 | P a g e
Annexure – 7: Score card of Home Rental Loan
Table 7: Score card of Home Rental Loan

Max Achieved Max Score

Parameters score score Sub parameter score Achieved
Family
details 3 1 Family size 2 0.4
      Dependents 1 0.6
Occupation
detail 9 4.2 Occupation 3 1.2
      Stability in business/service 3 1.2
      No. of adult earning members 3 1.8
Housing
Details 47 29.4 Electricity 2 2
      Area of the house 4 1.6
      No. of Rooms 3 1.2
      Personal contribution of client 5 2
      Previously rented out rooms 4 4
      Availability of tenants 5 5
      House Registration 2 0.4
      Ownership of house 3 1.8
      Stability in current house 4 0.8
      Rent(to be received after the loan) 4 1.6
      Accessibility to market 4 4
      Type of house 3 1.8
      Market value of house 4 3.2
Repayment
History 23 4.6 No. of loans repaid 6 1.2
      Timely repayment 4 0.8
      current liability(EMI) 4 0.8
      No. of installments delayed 5 1
      No. of cheques bounced 4 0.8
Reference
checks 6 4.2 Neighbors opinion about the client 3 2.4
      Behavior/attitude 3 1.8
Others 12 7.8 Present market value of all other assets 3 2.4
      Type of Bank account 3 1.8
      Monthly saving 6 3.6
Total Score 100 51.2
Risky,No Loan
    Grade C

32 | P a g e
Annexure – 8: Score card of Business Loan
Table 8: Score card of Business Loan

Max. Achieved Max. Score

Parameters score score Sub parameter score Achieved
FAMILY DETAILS 5 2 Family size 2 0.4
      Number of adult earning members 2 1.2
      Dependents 1 0.4
BUSINESS
INFORMATION 57 35.4 Number of years in a current business 4 4
      Present market value of the shop 2 2
      Peak season 3 0.6
      Value of the assets in the shop 4 1.6
      Number of transactions per day (in Rs.) 3 0.6
      Purchasing pattern 2 1.6
      Sales pattern 2 0.4
Number of employees compared to last
      year 1 0.4
      Business profit margin(Net) 4 2.4
      No. of suppliers 2 0.8
      No. of buyers 2 0.8
      No. of present employees 1 0.2
      Ownership 2 2
      Type of business 1 1
      Business registration 1 1
      Monthly turnover 4 4
      Average monthly profit 4 4
      Average stock 3 1.2
      Locality of business 3 1.8
      Arrangement of shop 2 0.8
      If home and shop are same 2 1.2
      Do you maintain books of accounts 2 0.4
      Secondary Business 2 2
      Shop Insurance 1 0.6
Repayment History 18 7.4 No. of loans repaid 4 0.8
      Timely repayment 3 3
      current liability(EMI) 3 1.2
      no. of installment delay 4 0.8
      no of cheques bounced 4 1.6
Reference checks 8 4.4 Neighbors opinion about the client 2 0.8
      Vendors opinion about the client 4 3.2
      Behavior/attitude 2 0.4
Others 12 8 Present market value of all other assets 3 0.6
      Bank account 2 0.4
      Monthly saving 7 7
Total Score 100 57.2
Risky, No loan
    Grade C

33 | P a g e
Annexure 9: Tool test Results
Figure 3: Tool Testing Results

34 | P a g e
Reference:
 Google.com
 Wikipedia
 Investopedia.com
 file:///C:/Documents%20and%20Settings/User/Desktop/junk/rest/The%20Importance%20of
%20Credit%20Reports%20and%20Credit%20Scores.htm
 CRISIL SME connect
 Baesens, B., Van Gestel, T., Viaene, S., Stepanova, M., Suykens, J. and Vanthienen, J. (2003).
Benchmarking state-of-the-art classi_cation algorithms for credit scoring.
Journal of the Operational Research Society

35 | P a g e