Financial inclusion has always been a critical goal of the Government of India’s economic policies. It can pave the way for India’s unbanked and underbanked population into the mainstream economic system, giving them equal access to financial services at an affordable cost, thereby reducing income inequality across the society. An essential criterion for financial inclusion is easy access to adequate credit for micro-borrowers who are otherwise unlikely to receive it from formal lending channels. In this socio-economic reality, digital lenders have a significant role to play, by creating alternative lending channels for the traditionally underserved population, and championing the cause of financial inclusion.
There’s a growing demand for hassle-free credit access among NTC or ‘New to Credit’ customers. Besides the underbanked population, millennials, and Gen-Z professionals, freelancers, aspiring entrepreneurs, even employees who receive salary in cash also fall under this category. There are about 300 million NTC customers in India, and they find it difficult to access credit from formal financial institutions like banks and NBFCs. While salaried individuals can easily apply for and receive loans, due to lack of credit history, NTC customers often do not qualify for even small-ticket loans, as most banks and traditional NBFCs depend on credit scores to approve underwriting. Additionally, many tier 2, tier 3 cities, as well as, villages experience an acute shortage of bank branches and other banking facilities, leading to their exclusion from essential banking services.
This is where digital lenders can help provide easy access to affordable credit to a large segment of the population. By leveraging new-age technologies, these lenders can create a financial ecosystem where they can serve underserved markets and improve their borrowing capabilities while securing their own interests. Digital lenders can empower NTC borrowers and eventually help them integrate into India’s formal credit system so that they can be eligible to borrow from banks and traditional lenders. This is because, for large ticket size loans, physical customer touchpoints is often mandatory. This is why both offline and digital lenders have to work in tandem to boost financial inclusion in India by all means.
Technology has been a real game-changer for digital lending services. Thanks to soaring mobile and internet penetration, underbanked sections of society can also avail of financial services from the comfort of their homes. Digitization of loan application processes can help borrowers apply for loans remotely – a very important requirement in a post-pandemic world.
By creating a user-friendly, fast, and secure digital infrastructure, fintech companies can not only help improve customer experience and ensure faster issuance of credit, but they can also reduce their operating costs, and expand their services across different locations and customer segments.
Digital lending platforms can bring down the turnaround time by reducing dependence on formal financial documents like tax returns, bank statements etc. as well as face-to-face customer interactions. By adopting cutting-edge technologies like artificial intelligence (AI), machine learning (ML), and big data analytics, fintech lenders are harnessing the true potential of data and ensuring a more comprehensive and accurate credit risk profiling. With the introduction of initiatives like video KYC, Aadhar-based KYC, account aggregators, lenders can easily access customer data, with their consent, and ensure better due diligence.
Customer credit data gathered from multiple non-traditional sources and customer digital footprints allow lenders to understand potential credit risks and make faster credit decisions, even in the absence of traditional credit history. By reducing the time required to assess the creditworthiness of prospective borrowers and minimizing paperwork involved, lenders can ensure a quicker and more seamless loan disbursal. What’s even better is that the data can be used to offer more customized credit solutions best suited to the borrower’s needs.
In a post-COVID era, more and more people and small businesses will need affordable and personalized loan products to recover from the economic impacts of COVID-19. There will also be a higher demand for low or no-contact lending processes. Contactless loan disbursal process may result in an increased risk of frauds, defaults, and other credit risks. As a result, a digital-first approach to lending is a must to efficiently provide credit to borrowers, in a faster, remote, and secure environment. With technology, digital lenders can identify parameters and pseudo indicators, which will help them understand the intent and repayment capability of borrowers in the current situation.
With banks focusing mostly on standard parameters like salary, credit scores, etc. fintech lenders can adopt a more agile and innovative approach and look for more alternative data points: example: geographical pin codes (to identify COVID red zones and green zone), employment industry (to assess which industries are more affected than others and thus the employment status of potential borrowers), employment proof recheck (to check for layoffs and salary adjustments) and more. With this, digital lenders will be able to identify the prime borrowers from the so-called subprime segment and reduce potential credit risks.
By introducing non-traditional sources of credit to a credit-starved population and small businesses, fintech lenders can help people get easy access to capital. And by adopting digital technologies, they can create a faster, safer, and more efficient lending ecosystem, which can protect the interests of both the borrowers and the lenders. Thus, India’s robust digital lending ecosystem has the potential to truly participate in the country’s economic progress by being drivers and enablers of financial inclusion.
(By Madhusudan Ekambaram, CEO, KreditBee)