For a large and diverse country such as India, it is critical to provide formal financial access to push consumer spending and investment. The Indian consumers are increasingly adopting digital as a way of daily life.
In India there were 220 million (18% of the population) smartphone users in 2016. This is an estimated to rise 340 million (28%) in 2017. There are about 150 million feature phone users who are eligible for an upgrade to a smartphone. Social-media friendly smart phones, which bring the browsing power of the Net to your palmtop, can be bought for as low as Rs 5,000.
The relationship between this rapid rise in the mobile phone sales and use is too obvious for anybody to miss.
To stay relevant in such an environment, non-banking finance companies (NBFCs) can leverage the vast digital (and social) customer data available to be able to serve customers better. The absence of income proofs or IT returns due to temporary/self-employment are some of the primary reasons for the tepid credit penetration in India.
Digital and social data can often act as an alternative to such documents to help NBFCs make better credit decisions. With the launch of the Digital India programme, a flagship programme of the Government of India to digitally empower society, non-banking finance companies (NBFCs) will have to find ways to serve the millennial customers through digital platforms and offer online loans to maximize customer reach and targets to expand customer base to five million by the end of 2018.
There are millions of people in India, who have the ability to repay loans, but still do not qualify for a bank loan because banks are too selective and demand citizens to have a credit score before they apply for a lending service. With limited or no banking activity, millions of such people do not have a credit score, virtually leaving them out of the booming consumption-driven economy. When they wish to buy a product where the costs are high; like a car, they are effectively left with mainly two options: take a loan from a private loan sharks at a very rate or save money to buy it outright. The new NBFCs, are filling up these major gaps with its financial inclusive concept of supporting households’ consumption.
While utmost due diligence is carried out, the method of establishing a prospective lender’s credit-worthiness method of lending is different from conventional banks. Since most of these are first-time borrowers, asking for an income-tax statement and bank account records cannot be a standard practice. It mostly depends on a person’s ability to repay and his or her current income flow, which can be determined by a host of alternative variables rather than tax statements and bank account records.
The focus on digitization of the financial system as well as India’s growing mobile phone usage universe offers a unique opportunity to tap into phone and other utility payments data base for giving out loans and determining credit-worthiness.
For instance, every time these individuals make a phone call, send a text, browse the Internet, engage social media networks on their phones, or top-up their prepaid cards, they deepen the digital footprints they leave behind. Data from mobile phone records, prepaid top-ups, mobile bill payments and mobile browsing or app download history can be used to assess consumer risk and determine the creditworthiness of underserved customers.
Lenders can use the output of their credit scoring to offer unsecured, small ticket, short-term credit at a much lower cost than traditional loans.
Likewise, with the explosion of e-commerce, Internet and social media usage in India can allow Internet browsing data to assess the credit-worthiness of customers. The practice of using data gathered from cookies, browser behavior and social media to determine the credit-worthiness of clients is already getting mainstream attention of its clients in Russia, Czech Republic, Spain, Mexico and Poland.
Technology can play a key role in offering access to formal finance in under-penetrated segments, where the market is multiple times bigger than the formal loan market.
The author, Marek Machala is Head of Online, Home Credit India.