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De-jargoend: Alternative data in lending

LiveMint logoLiveMint 30-04-2017 Vivina Vishwanathan

Alternative data for credit seems to be the new buzz word for the lending segment, especially for the financial technology (fintech) companies that provide small-ticket loans. Banks as well as non-banking financial institutions have also started considering alternative data to check your credit worthiness. Here is what it is and how it works.

Traditionally, the credit bureau companies use your past credit history to understand your credit worthiness. Usually, it is your loan data such as car loan, home loan or personal loans and credit card details that are used to evaluate credit worthiness.

Now, in case you are one of those who have never taken a loan, how will you be evaluated? That is where alternative data comes into play. Here, instead of using credit details, lenders consider your transaction data and information on social media platforms to understand your repayment capacity.

Alternative data cannot work in isolation. Hence, multiple data sets are collected to analyse a person’s repayment capacity. For instance, your bank statements will be used to check your ATM withdrawals to see how much you spend in cash. Your mobile bills data will be used to analyse, say your on-time repayment ability. Your e-commerce transaction data will be used as an indicator to see if you have the ability to spend within your income. Your social media data may be used to verify your location of stay, your employment details and your date of birth. Data from your mobile is also used to check the kind of apps you use. All this is done after your consent.

Is the data collection from these channels accurate? Experts say it is too early to say if it is accurate and working. Alternate data is usually used to give loan up to Rs2 lakh. For bigger loans, traditional credit score continues to be used.

If you are new to loans, there is a possibility that your details are verified from other sources too. If lenders have to verify details from other sources, they can do it only through your consent. Hence, only if you are comfortable sharing your information, should you allow any apps to read or share your information. For this, you will have to read the terms and conditions carefully when you download apps.

For lending, financial institutions want to know if you have the ability to service your loan. Through the data from various platforms, the financial institutions cross-check if you have the ability to service the loan. The lenders also look for stability, and a consistent transaction data is an indicator that the borrower is stable.

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