Financial inclusion is the process of providing disadvantaged populations, such as the poorest and most vulnerable, with inexpensive access to suitable financial goods and services. Heavy documentation and complex processes is a long time challenge for financial inclusion. So in this article we gonna cover, how alternate credit scoring can help people enter financial ecosystem.
Financial Inclusion term has been used in India since 2005. It is of concern that banking tends to exclude rather than attract a large segment of the population. The population belongs to the poorest and weakest section of society. In a report by internal rural lending and microfinance study group, banks were asked to review their current operations to help the underprivileged with the goal of financial inclusion.
Under this plan, the rules for opening bank accounts and issuing credit cards are less stressful for the poor. In January 2006, RBI authorized the use of NGOs, microfinance organizations, and civil society organizations as intermediaries to provide banking and financial services to the poor. Pradhan Mantri Jan Dhan Yojana, Sukanya Samridi Yojana are some of examples of financial inclusion.
Traditional Lending Decisioning
Before providing loan, banks must be confident in borrowers ability to repay the full amount. To determine this, they look at factors such as your credit rating and your debt-to-income ratio. If somebody require loan then the below steps are performed by the bank to determine the creditworthiness of the borrower.
Credit Rating Check
Credit rating is an important factor when obtaining an unsecured personal loan. While lenders usually do not disclose the grade they are looking for, they prefer good or excellent credit.
EMI Payment Check
If your credit score is low, you can try to improve it by paying your bills on time. Paying on time will help improve your credit rating and therefore increase your chances of getting a loan.
Debt to Income Ratio
The debt to income ratio is another important factor in your credit rating. If you have a high ratio, paying off debt can help improve your bottom line. You can also open a new credit card to lower your rate, but be careful not to spend more than you can afford just because you have more credit.
Income Stability
Although lenders look at your credit rating to understand your financial background, they also often view your income as an indicator of your financial future. The lender will be able to manage payments throughout the life of the loan. On the other hand, work can affect your chances of qualifying. Lenders will ask for your salary information and may even call your employer to verify your information.
Credit Decisioning
Credit analysis of banks in an application for a loan is the determination of a borrower’s credit profile for making a decision on granting a loan on an application for a loan. The analysis was carried out on the basis of the following 3 Cs:
- Capacity – Opportunities based on individual income and expenses.
- Collateral – Guaranteed availability and type of collateral for loans.
- Character – This feature is recorded in the records of the credit bureau
Credit analysis can be performed to determine the creditworthiness of the borrower and there are different ways to identify borrowers.
- Central India Information Bureau Limited, that is, the borrower’s CIBIL report, where all of its loans and history of down payments are presented in one report and banks prefer a CIBIL score of 750 or higher.
- Paying taxes where the borrower needs to know his annual income and deductions so that after the loan is paid he gets home at least 40% of his gross salary (for a self-employed salary)
- Assets and liabilities of the borrower in order to know his equity.
- Due diligence of the account must be performed by a certified public accountant (this will be done by the bank) to verify the net worth of the borrower.
Also Read: Lending Risk To Identify For Becoming a Responsible Lender
Alternate Credit Scoring
Financial institutions across India and around the world are exploring alternative data to better understand money management and draw conclusions for assessing credit risk. The number of digital transactions we all conduct today and the ability to process data through alternative approaches open up new opportunities for both lenders and borrowers. Understanding alternative approaches to data on borrower behavior can improve credit risk analysis methodologies and hence improve the financial inclusion.
Requirement of Alternate Credit Scoring
A young person just starting a new job or a middle-aged worker who has never taken out a bank loan is often rejected when applying for a loan due to a lack of credit history. You can pay other financial obligations on time and be able to make equal monthly payments. For example, young people can pay their postpaid mobile phone bills on time, and employees can pay their electricity and other utility bills on time. This is an alternate path to data through which creditworthiness of the borrower can be identified for who lacks in traditional financial data.
Benefits of Alternate Credit Scoring
Alternate Credit Scoring is very much needed in the financial ecosystem as it catalyzes Financial Inclusion.
Better Risk Scoring
Alternative Data is a collection of many elements such as rent, cellphone, and utility bill payments. Millions of unbanked customers can be reached using these criteria. These unbanked population’s creditworthiness may now be precisely monitored and identified.
Beneficial for qualified credit score consumer
Customers with good credit can also benefit from the introduction of alternate credit scoring. Alternate Decisioning provides lenders with additional information about their customers, allowing them to extend customer-specific schemes depending on their total customer score.
Better customer exposure
Customers such as students and pensioners are denied loans since they do not provide sufficient financial information. Alternative credit scoring enables such customers to obtain approvals despite having lower credit ratings. Millions of such customers are exposed to the financial ecosystem through different parameters such as bill payments and income to spending ratio.
Rule Engine and Automation
Alternate credit scoring parameters enable lenders to create rules depending on consumer inputs.This technique enables automatic loan approval and disbursement based only on rules, and such loans are called pre-approved loans. It saves time, which benefits both the lender and the borrower.
Conclusion
Financial service is each person’s right but traditional decisioning is keeping them away from this as they do not have traditional data to prove their creditworthiness. Banks and fintechs need to utilize the alternate credit scoring data parameters to grow their customer base at relatively low risk as alternate data also provides the clear picture of borrower’s credit profile.
Quickboarding allows financial institutions to build their custom decisioning models with the help of both alternate and traditional data sets. They can utilize these AI models for auto accessing the customer’s risk to take decisions quickly.
Quickboarding also allows financial institutions to write custom rules as per their internal process. It also allows collaboration between team members at different stages of customer onboarding.
It’s a time to keep pace with the growing technology. Traditional methods have worked for long time but now it’s time to change to remain in this highly competitive market