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Global finance has seen tectonic shifts in the realm of financial inclusion in recent years, driven by governments and private enterprises alike. At the centre of all decision-making is the mission to improve access to credit for all, as it would empower people economically to pursue entrepreneurship, take up jobs, among other activities. 

Despite these advancements, only 50% of adults in developing economies have the ability to access additional funds within 30 days in case of an unforeseen expense. As a result, non-banking financial companies (NBFCs) within this sector seeing a surge of innovation in underwriting methods.

What gave NBFC and Alternative Financial Services a boost 

In the past, loan approvals heavily relied on copious documentation submitted by applicants. This approach lends itself to significant challenges, especially in a country like India where several people struggle to provide the documents needed. 

The problems aren’t just with collecting these documents, but also extend to verification and processing—which then result in a delay when it comes to disbursements. In the end,  the process seemed cumbersome for consumers who have urgent financial requirements. 

For the credit-invisible and thin-file consumers, Alternate Financial Services (AFS) have emerged as an alternative to service credit needs, estimated to hold a market of $140 billion, growing at 7-10 percent each year. NBFCs are streamlining these informal borrowings with adequate data about an individual’s credit history, which has been made possible with the emergence of new-age underwriting methods.

A key component of these innovative underwriting methods is the use of alternative data sources, which alleviates the reliance on traditional credit histories.

Exploring alternate data sources

Alternate data encompasses any customer information not directly linked to their credit behaviour. This inclusive approach benefits first-time borrowers and enhances the lending process for those without extensive credit histories, empowering lenders with more informed decisions.

• NBFCs today are able to leverage various alternate data sources for loan evaluation – such as rental payments, utility bills, credit card history, and telecom data. Such data provides insights into an applicant’s living standard and repayment capacity.

• Lenders build social scores based on publicly available digital footprints. Social media profiles, publicly available info from utility providers and data from government portals – all offer additional data points for credit assessment.

• There are also third-party databases and technology providers who offer innovative solutions. 

Benefits of Alternative Credit Scoring for NBFCs

The incorporation of alternative credit scoring models has brought significant advantages for NBFCs. Beyond facilitating better credit assessment, these models have also proven effective in reducing instances of fraud, making the lending process more secure and reliable for these financial institutions.

The gradual mainstream acceptance of these alternate data sources is evident from the fact that credit bureaus are now developing newer credit scores for customers based on such data. As these techniques become increasingly prevalent, they are transitioning from being labeled ‘alternate’ to being embraced as standard practices in the lending industry.