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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: 18
th
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












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 3
th
of
September 2010.

Products of Mimo Finance
Joint Liability Group (JLG)
MESO Loan
Individual
Home
Individual Diary
Loan
Individual
Business
Loan
Individual
Micro
Enterprise
loan
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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 formulaes.
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







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List of Figures
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 MIMOs 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.
1.7.2 Vision:
To reach One million households in India by 2015.

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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

Figure 2: Structure of MESO








1.7.6 Competitors of MIMO in Saharanpur:
Fusion Bank
SKS
Basix
Ujeevan
Bandhan
Sonata
Disha (SHG)
Suvidha(Individual)
Share
BUSINESS HEAD
Sales and Recovery Dept.
Credit Appraisal Dept.
GM Sales
Sales Manager
Unit Manager (UM)
Recovery Officer Meso Loan Officer Verification Officer
Credit Exec. /Asst.
Credit Manager
GM Credit
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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

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








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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
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 6
th
July to 3
rd
of September.
2.5 Sample size
A sample of 15 from both business loan and home loan was taken.






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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

Analysis of data

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

Testing of the tool



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.
Preparation of report
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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
Testing of the tool
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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
(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)





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

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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 consumers FICO score to drop. Paying bills as agreed over time
will improve a consumers 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.
* 15% Length of Credit History As consumers 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 individuals 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 individuals 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.
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* 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 consumers 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
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 risksrely
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), Vigan (1993), and Lewis (1990).
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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

4.2 Proposed Loan Process
(Flow Chart 3: Proposed Loan Process)

Sales Officer
identifies
potential client
through field
visits and
references.
Sales Officer fills
loan application
and sends to
Verification
officer (VO)
Disapproves
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4.3 Financial analysis:
It is the duty of the credit executive to generate grades out of the credit tool and once the form is
filled by the field staff, the credit executive is the one who verifies the validation of the
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.
Effects on the profits:
Rejecting High Risk case means:
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.
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 clients 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 didnt 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.

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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





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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
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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 husbands 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 dont 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.







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5.2 Personal Details
Name: Nushrat
Year of Birth: 1963 (47 years)
Education: 10
th
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




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STORY
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.













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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
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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?







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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

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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















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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


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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
Reference checks
Two neighbors opinion about the client(in terms
of financial position)
Behavior/attitude
Others Present market value of all other assets
Bank account
Monthly saving



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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



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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
Monthly saving

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Annexure 6 : Score card of Home Improvement Loan
Table 6: Score card of Home Improvement Loan
Parameters
Max
score
Achieved
score Sub parameter
Max
score
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
checks 6 6
Neighbors opinion about the
client 3 3
Behavior/attitude 3 3
Others 12 12
Present market value of all other
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




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Annexure 7: Score card of Home Rental Loan
Table 7: Score card of Home Rental Loan
Parameters Max score
Achieved
score Sub parameter
Max
score
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




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Annexure 8: Score card of Business Loan
Table 8: Score card of Business Loan
Parameters
Max.
score
Achieved
score Sub parameter
Max.
score
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
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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%2
0Credit%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