Taking loans from banks used to be easy for established businesses, salaried people and for people with good credit scores (750+). Higher the credit score, lower the interest rate. But recent rise in loan defaults by big businesses and individuals has shaken the whole lending industry and led to extensive soul searching to discover innovative ways to tackle this market segment. With credit demand expected to reach USD 1.4 trillion by 2022, the sector is obviously lucrative.
Digital technologies provided some interesting ways to capitalize this unexplored market. For example, building online lending platforms where customers can register and start applying for loans. By offering online or mobile-first strategy and speed, digital can make credit available to customers in less than 48 hours. NBFC and Fintech firms are on the lookout for borrowers with low credit scores to increase their customer base.
But why to target customers with low credit?
- Low credit score customers are ready to pay higher interest rates
- Huge customer base: 190 million adults in India do not have bank accounts
These two reasons are big enough for NBFC and Fintech firms to cater to such customers since cost of raising funds by these firms have seen a rise in recent years.
How to check the credibility of customer with low credit score?
NBFC and Fintech firms use specific data points to generate their own credit score like:
- Social media activity
- Mandatory document uploading
- Income tax return
- Physical verification
- Intention, stability and ability of the borrower etc
The other sector getting benefitted from digitization is micro, small and medium enterprise (MSME) sector. Lenders are looking at the bank statements, credit records, transaction data, GST Data etc. to understand the credibility of these MSMEs. MSMEs have contributed approximately 29% to India’s GDP in 2017. They have also created almost 15 million jobs per annum over last 4 years. This clearly shows the importance of MSME in India’s growth.
But the biggest question is who will drive digitization in the country and take it to the next level?
Fintech start-ups are offering wide range of digital lending solutions in the market to attract customers.
- Payments gateway firms like Instamojo, Razorpay etc. are providing loan to small merchants who use their platform. Since these firm already have their transaction history it’s easy for them to track their credibility
- P2P lending firms like Faircent where an individual can lend or borrow money based on the risk profiling and the rating given by the company to the individual. The borrower are classified 6 basic risk categories – Minimal risk, Low risk, Medium risk, High risk, Very high risk and unrated categories, based on which interest rates are set.
To sum up, many new faces of lending are emerging. Growth is exponential in these new solutions, but is it sustainable?
Please find many more interesting facts in NASSCOM Report on Fintech Lending – “Unlocking Untapped Potential”. Find the link below: