The Indian market has a huge potential for unsecured loans and a cutting edge but controversial technology is being used the banks there for fast loan approval through the process of data mining on customers’ smartphones to test credit worthiness.
Apps that are able to look into everything – from Facebook connections to online shopping habits, are being used by Indian banks to make the assessment about an individual’s credit worthiness, in a market which has traditionally been averse to lend money to hundreds of millions of Indians who do not have credit histories. With this new approach, banks are hopeful of reducing the costs for risk-assessment and kick start a new wave of consumer lending.
Such tech is being used in Africa, China and elsewhere by microlenders and the Indian banks with sophisticated tech support, are developing, testing and preparing to launch such technologies, with the help of local and international fintech startups.
“This is not an exact science, but actually it is a much better science than looking at static data,” on long loan application forms, said Rajeev Ahuja, executive director at RBL Bank Ltd. Ahuja’s firm is partnering to make use of social media for assigning scores for customers who do not have credit histories.
For the first time, the technology was put to use last month in India by FICO, the largest credit-ratings firm in America. Sally Taylor-Shoff, a FICO vice president said that FICO used so-called alternative data sources to “evaluate millions more consumers who were previously unscorable.”
Regulatory hurdles and consumer concerns have hindered deep digging by credit agencies into phones of customers in the U.S. However, a national database of information on borrowers is available in U.S. and hence such deep digging is not a must. Development of systems that can be used to obtain permission from applicants so that banks can access customers’ phones and regulatory guidance about privacy issues are factors that banks in India are waiting for before launching this method.
There are millions of people in India who are fond to be too expensive to lend by banks and such a secti0on could bee brought in the credit net with the mainstream Indian banks making use of such methods on a large scale. Phone probing methods have been primary used by financial startups and microlenders till now.
“If we manage to do it right as a country, potential for application is the largest,” in the world, said Rajesh Kumar, co-head of retail risk at HDFC Bank Ltd., which is the second-largest private-sector lender in India and it may start using this substitute data as early as next year.
According to the Reserve Bank of India, there is about $1.09 trillion of outstanding loans with the commercial banks in India till the month of September. Personal loans account for $270 billion of those loans and a part of this loan segment has seen more growth than the overall loan market.
Monish Anand, chief executive of fintech startup Datasigns Technologies says: “people are invisible to the bank,” die to the fact that it is too costly to pin point the amount of debt that they can handle.
(Adapted from The Wall Street Journal)