What makes a good borrower in the Indian MSME market - A view from Entrepreneurial Finance Lab

What types of loan applicants are the most likely to repay in India? Are the most successful entrepreneurs risk-takers, innovators, or optimists? A great challenge lenders in India face is in assessing the risk involved in extending loans to micro, small and medium enterprises (MSMEs). Such companies are a large part of India’s industrial landscape—85% of Indian manufacturing happens in companies with less than 49 employees. And yet, such enterprises, especially the smaller ones, often don’t have continuous documentation of banking and credit histories and other records or good quality collateral that traditionally help lenders assess risk. Our organization, the Entrepreneurial Finance Lab (EFL), solves this problem by helping lenders adopt a different approach—assessing risk by creating a psychometric profile of a borrower. Our data and experience around the world show unambiguously that personality is a pretty good predictor of how likely a person is to repay loans. Our partners across India have administered our psychometric credit assessments in over 15 Indian states. We have analyzed over 10,000 applicants’ characteristics in relation to default behaviour specific to the local lending market that caters to the MSME segment. This allows us to define some characteristics of what makes a good borrower in the Indian MSME market.