Pandemic-driven loan defaults and debt moratoriums in India are necessitating urgent digital innovation to help the unbanked and protect credit institutions.

Credit worthiness is an important component of financial inclusion in Asia. With a unbanked population needing inclusion in India, financial technology can be a lifesaver in bridging the divide between the needy and the credit institutions.

One Singapore-based fintech company, CredoLab, has been attempting to tap smartphone device data to boost financial inclusion in India for the last five years.

The firm generates behavioral scores to gauge the credit worthiness of every customer in a matter of seconds, to speed up processing of financial support from businesses such as banks, lenders, e-commerce, travel, ride-hailing, e-wallets, insurance, and retail companies.

DigiconAsia interviewed the firm’s spokesperson, Tarun Kumar Kalra, on India’s financial policy and the challenges of getting the unbanked banked.

Tarun Kumar Kalra, Spokesperson, CredoLab

DigiconAsia: What can be done to help the unbanked? What are CredoLab’s plans in this initiative?

TKK: Globally, emerging economies have struggled to provide last mile connectivity for an effective financial inclusion agenda. India’s investment in technology and telecommunications infrastructure has made this adoption easier. Financial literacy can be used as a stepping stone to financial inclusion.

The National Strategy for Financial Inclusion 2019-2024 lays out the plans for the governmental and private agencies to boost financial literacy and hence, demonstrate the advantages of financial inclusion. With credit given on fair terms across various customer segments, business profiles, gig economy workers and micro- to small and medium-sized enterprises, accelerating India’s growth to become a US$5 trillion economy by 2027 is possible.

In this respect, the challenges broadly include issues with: financial and digital literacy; the high-cost structures of full-service universal banks; assessing rural sector credit worthiness; the plight of gig economy workers; and last mile connectivity and outreach to the mass population.

We, in CredoLab, continue to work with new digital lenders, Buy Now Pay Later (BNPL) players, micro-lenders, financial aggregators globally to help build a smartphone-based behavioral scoring framework for better credit evaluation.

DigiconAsia: How is your firm solving the challenges of banks and other lending institutions?

TKK: Traditional full-service universal banks have struggled to evaluate the non-traditional consumer segment of the market for credit disbursements. This has primarily been driven by the high-cost structures aligned towards a higher average ticket size and lack of non-traditional evaluation tools that provide a robust credit scoring framework.

The upsurge in the demand for loans and payment deferrals triggered by the COVID-19 pandemic caught banks and lenders unprepared. This further underscores the need for the financial sector’s digital processes and advanced analytics for building resilience, scale and assurance.

The adoption of alternative data scoring spiked as banks and lenders in India began to understand the relevance of this methodology. This is where CredoLab has carved a niche of its own, by harnessing the power of smartphone-based behavioral metadata to create scoring algorithms that predict the probability of default.

Our machine learning algorithms convert digital-footprint information into millions of combinations that  essentially can identify customers that have the willingness to repay loans reliably. The scoring system complements the traditional sources of data for thick file customers and provide a valuable source of scoring the thin file, underbanked population.

DigiconAsia: With Non-Performing Assets (NPAs) being one of the biggest issues Indian banks are facing in the pandemic, how can alternative credit worthiness scoring systems help?

In its latest Financial Stability Report (FSR), the Reserve Bank of India (RBI), under the worst-case scenario, noted that gross NPAs could rise as high as 14.8% by the second quarter of 2021–2022.

If such a scenario were to materialize, it would be the highest percentage of bad loans since 1999. The pandemic is exposing the fault lines for unsecured consumer lending. In April 2020, 50.4% of consumers had opted for loan moratoriums, with another 30.8% incidence in the corporate segment.

Lenders will continue to be conservative and cautious while evaluating loans to the segments of society that have been the hardest hit by the pandemic. Gig economy workers, small businesses and underbanked individuals with irregular income patterns are the most vulnerable and the ones that need access to credit to rebuild their business and finances. 

The pandemic-induced loan moratorium would not reflect accurately on traditional credit bureau scores: that is where our smartphone behavior-driven credit scoring can provide an alternate data-driven scoring mechanism. On another front, the RBI has put in place regulations for NPA classification, Tier-1 capital allocation, capital efficiency, etc., to allow banks to emerge stronger from the global recession.

Differential licensing for new financial entities—providing flexibility to digital banks, digital lenders, BNPL players and P2P lenders—will develop a financial ecosystem for consumer lending to the financially excluded and underbanked segment, to drive the consumption-driven recovery that the Indian economy is anticipating.

Also, as fintech players build frameworks powered by alternate data, they will be driven to manage client data ethically and responsibly.

DigiconAsia: What does the near future hold for the unbanked population in India?

TKK: Our algorithm has been trained with years of data, so it is accurate enough to ensure our clients see a drop in their cost of risk, while improving their approval rates. In India, we shall be working towards harnessing a more financially inclusive ecosystem and multiplying the number of clients by five times at the end of 2021 in the country. Also, three initiatives can help the unbanked population in India and elsewhere, going forward:

Boots on the ground: We look to expand our footprint equally between emerging and developed economies. We are investing heavily in tools and process optimization frameworks that will help enhance productivity and drive revenue enhancement.

Expanding TAM with embedded finance at the core: The digital financial services market is evolving and we have seen a growing relevance and demand from new segments, in addition to traditional banks and non-banking financial lenders.

Emerging segments like neo banks, digital banks, digital fintech lenders, market aggregators, BNPL and e-wallets are providing us with the opportunity to provide greater financial empowerment through embedded finance and embedded scoring. This enhanced Target Addressable Market (TAM) increases the opportunities we have to mine on the ground.

Channel Force Multiplier: We continue to see great interest and relevance from leading credit bureaus, global financial services companies and analytics players to build a joint ‘Go to Market’ that would help us drive scale and reach providing the force multiplier.

DigiconAsia thanks Tarun for his useful insights.