The article that someone tweeted about, posts that they liked on Facebook, and a new phone just bought on an e-commerce site—all these events now play a crucial role in determining if an individual is eligible for a loan or not.
In India’s booming online lending technology ecosystem, firms are heavily relying on unconventional data to assess a consumer’s loan eligibility. Unlike banks, which typically depend on credit scores, bank account statements, and income-tax returns, these new-age firms are moving away from the traditional method to judge repayment capacities and, based on their own algorithms, are coming up with dynamic credit scores to effectively assess a customer’s credit worthiness.
Online lending firms have seen rapid growth in the last two years, despite the presence of a wide network of banks and non-banking financial companies (NBFCs) in India. That’s because, till 2015, about 70% of Indians remained under-served by banks and other financial institutions, an opportunity that these firms are trying to cash in on. Now, even banks and NBFCs are tying up with online lending firms to reach out to more customers.
The 166 million households that make up middle-income India—with annual earnings of between Rs2.2 lakh ($3,414) to Rs3.59 lakh ($5,572)—typically apply for personal loans to buy consumer durables, for weddings, to meet medical expenses, set up a new business, and the likes. These consumers are a potential goldmine for online lending firms because they include many first-time borrowers who may struggle to understand the exhaustive paperwork and procedures to secure a loan from traditional banks.
One part of the puzzle is speed. As tech-savvy consumers move their banking transactions to the internet, including procuring loans, lenders are having to significantly accelerate processes, explained Manav Jeet, CEO of Rubique, an online financial services marketplace. The average ticket size on lending platforms is usually limited to anywhere between Rs20,000 and Rs2 lakh.
“As a consumer, our needs are evolving and we need scenarios where there is a faster turnaround time. By using artificial intelligence and algorithms, we can drastically reduce the time taken to approve a loan request, compared to the traditional lenders,” explained Jeet. Rubique, founded in October 2014, claims to be one of the largest online lending platforms, providing loans to small and medium enterprises and individuals.
Compared to brick-and-mortar banks that can take several days to assess an applicant, these financial technology (fintech) players can decide to lend within a few minutes by using algorithms that can collect supporting personal, professional, and financial details of potential borrowers. The list of items assessed can include social media profiles, friends on social media, payment history for telecom bills (for postpaid customers), geographical locations, online shopping history, devices used for surfing, lifestyle details, the internet usage timings, consumption patterns, etc.
“We have about 80-90 parameters that are used to check a consumer’s credit worthiness. And that’s where technology comes into play to ensure that it can be done swiftly and efficiently,” said Satyam Kumar, co-founder, LoanTap, an online fintech platform that provides retail loans to salaried individuals.
However, even for these online firms, the thumb rule for lending remains the same: capacity and intention to pay back. And they believe the digital footprint allows them to do deeper vetting around these parameters. ”The traditional credit score gives a peek into a consumer’s history but may not necessarily be the best way to determine future repayments. For that one needs to understand current consumer behaviour and that can be done with the help of alternate data,” added Kumar.
Online lending channels can be useful for first-time borrowers who do not have a credit history, which makes traditional banks wary of them. But, in certain cases, relying on alternate data to determine credit worthiness may be a better way than how banks go about it.
“These are unsecured loans (similar to personal loans or credit cards) and in this case, apart from the income documents, banks usually ask customers a few questions to assess their credit worthiness. But these online firms can do the same task by checking the digital footprint and other such details, which may be more authentic as it’s usually difficult for customers to fudge all that,” said Kalpesh Mehta, partner at auditing firm Deloitte Haskins & Sells.
Considering the relatively straightforward online system, these platforms are increasingly also being used by customers who have a fairly strong credit footprint. About 25% of the customers on Faircent, a peer-to-peer lending firm, are ones with a fairly strong credit score, explained Shivam Gupta, the company’s chief risk officer. “Still, at times they choose us over a bank for the convenience factor or because the customer profile has changed due to a job change, etc,” he said.