Alternative Data Sources: The Solution to Make Digital Lending Inclusive

Financial independence and accessibility are without a doubt the two key pillars of India’s expanding economy. The evolving FinTech ecosystem of the nation is enabling individuals and businesses to have easy and faster credit access, customized to their needs, to facilitate this growth. Unfortunately, access to formal credit, especially to MSMEs, has been a challenge for loan providers. This can be attributed to the lengthy loan disbursal process and assessment of the credit risk worthiness.

Often, lack of proper documentation hampers this process. Restrictive costs of financial products and services alongside low penetration of banking services in semi-urban and rural communities of India is another problem plaguing the lending industry. While Digital Lending has been able to address some gaps, there are still areas such as risk worthiness, product customization etc, for varied market segments and availability of formal credit providers that need attention.

So far, traditional data has been being used to determine a borrower’s risk appetite and future requirements. Loan providers are now leveraging surrogate data resources such as social media, telecom activities, spending patterns along with psychometric analyses to serve the credit-invisible customers.

In today’s age, there is a continuous creation of large pools of structured and unstructured data thanks to mobile phones and the internet. By tapping into alternative data sources and data analytics, lenders can offer wider, customized services and bring more people into the formal credit system.

Typically, the credit worthiness of a borrower has been evaluated based on reams of documents submitted as part of the application process. Those in the rural parts of the country are often unable to furnish their records, forcing them to resort to informal credit channels that charge an exorbitant interest rate. Utilizing unconventional sources of information to analyze the credit score and repayment capacity can make affordable credit accessible to the underserved. In the MSME category, alternative sources like PoS information, utility bill records and other fixed business expenses can offer an all-inclusive credit risk assessment and ability to curate loans.

Information gathered from social media and other sources can potentially flag fraudulent behavior or inconsistencies in online behavior with the submitted application. This can help loan providers to take preventive measures and deploy a deeper verification mechanism for a customer’s credit history to mitigate fraudulent activities.

Alternative data is slowly picking up pace in India’s lending industry but lenders are yet to explore it to its full extent. In today’s digitally native world, lenders can fasten the entire digital lending process and offer tailor-made solutions while mitigating risk, by leveraging different data sources and insights.