by Aditya Kumar
In recent times, there has been a disruption of sorts in the lending space, thanks to a bunch innovative technology forces. This has led to personal loans being easily available to a wider audience today. It wasn’t very long ago when applying for a personal loan and getting one was a tedious and time-consuming task. The eligibility criteria were stringent, allowing only a select class of working-class professionals and self-employed individuals access to unsecured personal loans. Thanks to the emergence of fintech in the market, personal loans have been able to reach an enormous number of individuals, especially those amongst the working class residing in India’s Tier-I cities.
Traditional lending players continue to be top players in the credit market, but as far as unsecured personal loans are concerned, fintech lenders have overtaken banks in many Indian cities. They have substantially increased their market share by catering to a greater number of individuals with a wider array of personal finance options.
The deeper the credit penetration in an economy, the larger the scope for accelerated economic growth. When we talk credit here, we make reference to both unsecured and secured credit instruments. Credit cards and personal loans are the two most prominent unsecured credit instruments in the market while home loans and car loans are the most popular sources of secured credit.
There are a good number of fintech players operating in the market today, who are improving the style, efficiency, efficacy and seamlessness of service delivery in the finance sector. Most of them operate in the unsecured credit space, with personal loans being the most popular credit product.
Here are some noteworthy ways in which fintechs are ensuring credit access to a larger section of the working class populace.
They are redefining eligibility norms
If you didn’t know it already, private banks and traditional lending institutions do not provide loans to applicants with low credit scores. While most traditional lenders offer loans to individuals with a minimum credit score of 700, a few top private banks require individuals to have a score of 750 to qualify. On the other side of the spectrum are fintech lenders that offer credit to individuals with lower than prime scores, and some offering loans to individuals with credit scores as low as 575.
This has helped these players offer loans to a larger segment of individuals, who are otherwise rejected owing to their low scores.
While we compare the eligibility norms adopted by fintechs to those adopted by private banks, providing loans to people with lower credit scores isn’t the only mechanism using which the former has increased its credit penetration. Relaxing the norms based on eligibility based on income levels, type of residence, and employer categorization are other aspects that are enabling them to expand their footprint.
To substantiate, fintechs offer instant loans to individuals with incomes starting from Rs. 20,000 (net monthly income) while many top private banks require individuals to meet a minimum income eligibility criterion of Rs. 30,000. Some banks even require income levels of over Rs. 40,000 to be eligible for unsecured credit.
As for type of residence, fintech players provide instant loans to individuals residing in shared accommodations, and to those who’re employed in uncategorized or unlisted companies. Usually, private banks reject applications of such individuals who are employed with unlisted companies, regardless of their credit score.
They are pioneering the way for a paperless and seamless application process
Fintechs have adopted a completely digital and paperless application process, ushering in great ease when applying for credit. Applicants can fill out their details within minutes and get instant approval based on their credit profile, while also being given the provision to upload their documents online. Once the documents are verified, a customized loan offer is sent, post which the loan amount will be disbursed within 48 hours.
The turnaround time (TAT) is significantly lesser in comparison to the TAT on loans offered by private banks. Due to this attribute, an increasing number of individuals are choosing fintech services over private banks. Established banks easily take a minimum of 7 days to process applications and disburse amounts.
Another point to be noted here is the ease in applying for unsecured personal loans with fintechs. The process is as simple and straightforward as maybe purchasing something online, and can be completed within a few minutes.
Real-time risk evaluation algorithms are a fintech’s market advantage
The instant approval feature is quite an impressive feature that many Fintechs have enabled through proprietary risk-based algorithms. As mentioned earlier, information on a customer’s credit profile is obtained almost immediately from the bureau, and by way of real-time evaluation through the algorithm.
And that’s how fintech is revolutionizing the scenario, to create a lending space starkly different from what it used to be, thereby increasing the number of working-class Indians who are getting access to unsecured credit. Its affect on India’s economic growth will unfold in the years to come.
Aditya Kumar is the founder & CEO Qbera.com.