Need a loan? Give a psychometric test first

What would you do if you break a traffic rule? How would you opt to return a misplaced purse of somebody living hundreds of kilometres away?

Next time you seek a loan, lenders may ask you such questions with no obvious right or wrong answers in a bid to evaluate your willingness to repay their loans. Welcome to the evolving world of psychometric credit scoring.

Right now, a niche set of lenders is using this predictive method of building a credit score for people who lack credit histories. If things progress, very soon banks in the country may start using the method for lending to the previously 'unscoreable' population. Credit bureaus like Cibil collect and maintain records of an individual's payments pertaining to loans and credit cards. But what if the person has never taken a loan? This is where the 'intent to repay' becomes a black hole. A potential borrower may have the ability, but whether he/she actually wants to repay can lead to loan cancellations, say experts.

Yogesh Mariwalla, executive director, Index Advisory, said, "Conventional screening methods like personal interviews, personal data, past credit transactions have their limitation. They check the ability, but not the intent of the borrower. A psychometric test bridges that gap. It takes 20-30 minutes. There are no right or wrong answers. In this way, it's difficult to fool us. We are in talks with some banks as well." Index Advisory has provided psychometric tests for companies like Medtronic, Vistaar Finance, Electronica Finance, Arogya Finance and Orb Energy.

Arogya Finance gives loans for medical expenses. "We give medical loans of up to Rs 2 lakh. In cardiac cases, Rs 5 lakh is also given. Our typical customer doesn't have any credit history. But they need credit. So, we ask them to give a small psychometric test online and convey our decision after evaluating the profile within 3 to 48 hours. Our collection rates are in the high 90s," says CEO Jose Peter, who was earlier CFO at Tata Motors Finance.

Janalakshmi Financial Services, which features among India's 10 largest microfinance institutions and has got Reserve Bank nod to become a small finance bank, had engaged psychometric test provider EFL to control risk and expand individual lending. Borrowers who received lower scores defaulted more often than those who received higher scores.

Bidhan Chaudhuri, chief operating officer, Janalakshmi Financial Services, told DNA Money, "When used in conjunction with our credit assessment models, psychometric tests showed results. It's difficult to get credit history data of urban poor. So, these tests help us understand more. At the moment, there is no other way to understand the mind of a potential borrower."

Alan Martinez, director of advisory services, Africa & Asia at EFL, feels that by focusing on the individual and improving a lender's understanding of repayment behaviour, financial institutions can use alternative data scores to reduce collateral requirements and improve pricing decisions. Also, psychometric tests help remove human bias.

"Where there is no credit history, many institutions engage in time-intensive visits to gauge credit-worthiness. With over $1 billion in loans processed through our system, our database is doubling every year. We have successfully calibrated our scoring across over 25 countries including India. EFL is in discussions with lenders across India to expand the use of our alternative data tools for traditional lenders, fintech start-ups and funders of consumer and entrepreneur finance," Martinez added.