Predictors of Consumer Creditworthiness: Evidence from Personal Loan Borrowers of a Leading Public Bank in Sri Lanka

Abstract

Purpose: The motivation of this study is to explore the significant determinants of consumers’ creditworthiness which support the development of a credit scoring model as non-performing loans are a major problem in lending institutions. Design/Methodology/Approach: Data were collected from four branches of a leading Commercial Bank in the Gampaha District under the convenience sampling technique with 130 personal loan borrowers as the study sample. Findings: The logit model test resulted that age, level of education, and monthly income, are positively influencing the creditworthiness of the borrowers. Increasing the number of dependents and the tenure of the loan have more chances of default. 39% to 56% of the dependent variable was explained by the independent variables in the regression model and the model predicted default correctly by 85.4%. Originality: The study contributes to the existing literature in terms of identifying important predictors for developing a credit-scoring model while helping lenders to assess the creditworthiness of personal loan applicants. Hence the study will assist in taking effectual measures to enhance the quality of the credit approval process and ultimately reduce the losses of lending institutions from bad debt.