Mumbai March 11,2014: Within his vision for transforming the banking sector, Deputy Governor of the Reserve Bank of India (RBI) Dr. K.C. Chakrabarty, has stated the importance of the MSME sector in fueling larger economic growth, “[MSMEs] play a pivotal role in generating employment, increasing cross-border trade and fostering the spirit of entrepreneurship.” [1] Indian MSMEs play a huge role in the Indian economy: there are an estimated 26 million enterprises that contribute to 40% of India’s exports, 45% of manufactured output, 8% of GDP and employ almost 60 million people. [2] In contrast, almost 93% of MSMEs are excluded from the formal financial sector, limiting their potential growth. [3]
The RBI cites that part of the reluctance of the formal financial sector to extend credit to micro and small enterprises arises from lenders’ inability to assess the potential of applicants with thin credit histories. Thus, the RBI recommends the use of credit scoring to better lend to this priority sector.
The Entrepreneurial Finance Lab (EFL) (www.eflglobal.com) is an analytics and technology firm founded at Harvard University that works to fill this credit gap to self-employed individuals and micro and small enterprises, which economists have termed the “Missing Middle” of finance. Through leveraging psychometric principles, EFL is able to generate a credit score for any entrepreneur.
EFL partners with some of the largest lenders across 20 emerging markets, including India. EFL has assessed over 80,000 entrepreneurs globally while enabling $250M USD in loan disbursements to underbanked MSMEs. Lenders use EFL’s innovative credit-scoring technology to expand their MSME portfolios, decrease defaults and improve operational efficiency.
The EFL Test
Traditionally, Indian lenders analyze a borrower’s financial history and credit bureau score as a basis for loan approvals. In contrast, EFL’s technology focuses on the borrower’s potential, more specifically his/her willingness to repay and entrepreneurial skill. “EFL essentially codifies a loan officers ‘gut’ instinct in sniffing out good borrowers,” explains Mrs. Emily Silberstein, who runs EFL’s business across Asia.
The EFL test is a 30-45 minute survey that includes controls for fraud and gaming and is administered in vernacular languages on a PC or tablet. EFL analyzes the applicant’s test data and produces a 3-digit credit score that predicts a borrower’s probability of default. EFL’s analytical models are built on 9 years of test responses correlated with borrower repayment behavior from across the globe.
As EFL continues to administer tests and track subsequent defaults, its model, which operates on machine-learning techniques, becomes increasingly predictive. Mrs. Emily Silberstein states, “We calibrate our analytical model to reflect the differences in cultural contexts. The preliminary Indian model is proving to be highly predictive of applicant default. As we continue to collect more data, the model becomes more refined, incorporating nuances of the diverse regions and cultures of India.”
EFL’s market presence in India
Upon entering the Indian market in March of 2013, EFL has partnered with several lending institutions including Janalakshmi Financial Services (JFS), a large Indian NBFC serving the urban underbanked. JFS has pioneered a model to graduate the urban underserved up the financial inclusion ladder beyond microfinance into individual lending. In partnering with EFL, JFS is working to expand its client base of individual borrowers while controlling risk. EFL psychometric credit scores allow JFS to better “capture” high scoring applicants with faster service and less paperwork.
Ram Ramdas, CEO of Jana Urban Foundation (JFS holding company), explains, “We are proud to be the forerunners in using psychometric credit evaluations for entrepreneurs in India. Our partnership with EFL has come at an important growth point in the company, where additional transparency in applicant risk assessment enables us to serve more of the underbanked urban population of India.” Currently, JFS is using EFL’s tool across 15 Indian states and has tested nearly 7,000 borrowers over 10 months. BWI
