Is Alternative Credit Scoring Method a Smart Move In Indian Fin-Tech Business?

Ashish M. Shaji

22 Oct, 2020

Alternative credit scoring refers to an electronic collection of data from the payment behavior of the consumer, associated with regular expenses such as mobile bills, the internet, and utility bills.

Why is an Online Lender Focusing On Alternative Credit Scoring?

The world is moving from offline to online traditional lending model.  Alternative credit score models are causing disruption in the lending business in India, the way loans are underwritten and applicants are assessed.

The need for alternative credit scores was developed by online lending companies in developing economies like China and India. In general terms, an online lender should not deny you credit in case you do not possess a traditional credit score. Various institutions like ICRA, CIBIL, in India allow the credit scoring for individuals on the basis of a well-stated set of rules and procedures. Anybody not falling under the criteria of these credit rating institutions are denied a credit score or are adorned with low credit scoring, thereby failing to advance any credit from the market.

In such a scenario, the concept of alternative credit scoring comes to the rescue. In the case of alternative credit scoring, the lender takes into consideration the data relating to payment history like bill payment, bank balance and another expenditure pattern of the loan seeker. If the pattern is positive, the loan is provided without any hassle. The alternative credit scoring is generally determined via the maximum use of technology.

The use of alternative credit scoring for online lending has been deployed by the NBFC registration in India. Around 12,000 NBFC licenses have been issued by the RBI^[1] to fulfill the loan requirement in India. Most Indian consumers are unaware of the benefits from financial services and this stops them from growing.

In rural areas, if you borrow a loan, it means you are not doing anything.  This is the reason traditional credit scores are not available for the majority of Indian citizens. Hence online lender / NBFC / Fintech companies have been aggressively developing software mechanism to record the alternative credit score and fulfill the loan requirement of the community, who are currently unaware of the benefits from financial services. In countries like United States, UK, or Canada, millions of people don’t have official credit scoring. Despite this, they own houses, vehicles, etc. And a large number of this population are professionals or retired individuals.

The Changing Credit Scenario around the World

Looking into the future of the financial service industry, there is an extensive recognition on making use of the technology, not only to improve compliance and operational efficiency but also to create new cradles of returns in the lending market. There has been an increase in the application of big data and data science improvements to support the growth of alternative credit score models. These models enable credit lending firms to cater to the financial needs of the underserved section.

This concept is rapidly being followed by lenders to supplement their traditional funding mechanism. These non-traditional sources of data, together with the use of advanced analytics, can be used to assess the creditworthiness of the large and previously intact customer.

New Players in the Market

Many start-ups in India are engaged in providing the alternative credit scoring to the individuals which can be used by them for availing credit; at the same time, providing investors with an opportunity to earn lucrative returns.

These firms, providing an alternate credit score, helps individuals and small businesses in obtaining personal, vehicle, working capital and other types of loans, and cater predominantly to either salaried or self-employed. The rapid increase in the number of customers over the past few years is the clear demonstration of the simplicity, speed, and convenience delivered by the alternate lending companies.

Besides providing credit to otherwise ineligible borrowers under the traditional lending system in a timely manner, alternate lending firms also provide numerous other features such as online tools/calculators, knowledge centres, live chats, tracking of application status, etc., bringing in greater customer satisfaction.

Advantages of Alternative Credit Scoring

The market players making use of the alternative credit scores have realized several growth opportunities, which are as follows:

• New Segments of Customers- The cadre of the population which is unable to attain a valid credit scoring includes homeowners, professionals, retirees, and new immigrants. It allows more borrowers to apply for loan whether young people with no credit history or with low scores.
• Differentiated customer experience– Apart from expanding the facility of tailored products and outgoing customer experience, alternative data used for credit scoring allows the lender to streamline and automate the process of loan reimbursement, thereby delivering faster loans to the customers.
• Enhanced underwriting processes- The customary process of underwriting can be improved by many non-conventional variables such as credit card and banking transactions, presence in social media, payment of utility bills, and employment history. This can lead to reduced credit risk through improved risk modelling and monitoring.

Challenges for NBFC in India in Collecting Alternative Credit Scoring

• Data Accuracy and Objectivity

Ensuring data accuracy and objectives for which data has been segregated should be of paramount importance. Additionally, alternative credit scores are still in their infant stage and their successful adoption is yet to happen on a global scale.

• Manipulation

The wide variety of alternative credit score models makes it more complex for the average applicant in choosing the right option so as to get efficient scoring. Moreover, there are chances of manipulation since an applicant could create the impression of wealth, which is not present in reality. A balance should be created between the new methods and traditional factors, such as income and savings, in order to ensure accuracy and mitigate risk.

 Conclusion

The use of alternative credit scores in the traditional financing process is still in its developmental stage and research initiatives should be undertaken by the NBFC to gain additional insight into the whole process of alternative scoring and accordingly update such models. Investment in research should also be done to compare performance across different models in order to synergise and improve scoring models.

Read our article:How are emerging technologies helping NBFC’s?