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Perceiving new opportunities: What alternate credit systems mean for retail investors?

CNBCTV18 logo CNBCTV18 22-10-2021 Contributor
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As per a report, over 90 percent of retail investors have affirmed the fact that seamless lending processes occupy a central focus concerning decisions that involve lending via P2P platforms. And Why not?

This vast and hitherto untapped user demographic has continuously faced financial exclusion on account of unstable incomes, negligible credit scores, and lack of credit history.

This means that conventional banks and NBFCs do not address the financial needs of such a significant and sizable faction of the national populace. And this is exactly where alternate credit scoring pathways come to the rescue.

What are Alternate Credit Systems?

Alternate credit systems are fast revolutionizing the financial landscape in the country. In simple terminology, alternate credit scoring mechanisms enable the traditionally underserved sections of the society to achieve access to financial credit using alternate pathways such as the applicant’s digital footprint and other real-time data points. The rise of alternate credit scoring has instrumented the development of a broad-based credit scoring methodology. It is able to transcend traditional strictures ordained by regulatory bodies like CIBIL.

Interestingly, the next-gen consumers who are quite new to the credit and lending ecosystem have the opportunity to extract maximum advantage through alternative credit scoring mechanisms. Though a plethora of people have zero access to credit due to poor CIBIL scores, paradoxically, without applying for credit one cannot improve their credit score. Therefore, to alleviate the extant underserved and unbanked lot from this distressing catch-22 situation, a fleet of new-age fintech companies are advancing alternative credit systems to enable credit access and bring the ones left out under financial cover.

Not only that, these novel credit mechanisms that use alternate pathways for ensuring credit to the under-banked can also provide a lucrative investment opportunity for numerous retail investors. By catering to the financial needs of a substantial consumer demographic that has been persistently denied the same, retail investors are seated atop a veritable goldmine in the form of countless new subscribers and loan applicants thronging to receive a new-found source of credit for meeting everyday expenses and financial challenges. By financing these alternative lending platforms, Retail Investors are actually providing a great national service by speeding up the process of financial inclusion.

Therefore, fintech loan investments have emerged as a novel asset category for retails investors that are quite in contrast with low-yielding bank deposits and more extensive than single company debt exposures. Principally speaking, disruptive fintech lending platforms can disrupt the conventional fintech circuit by extending reduced interest rates to borrowers while simultaneously providing heightened returns to investors. The investor community recognizes the intensive technological optimisation that has been instrumental in bringing down excess overhead cost for credit arbiters by eliminating the dependence on physical branches by enabling end-to-end automation of loan applications, credit assessment processes, and pricing modules.

Point of caution for Retail Investors

These alternative credit systems utilize unconventional modes to ensure that the underserved are finally able to access credit facilities, even without a credible credit score. Several fintech pioneers are warranting credit availability for one and all by leveraging non-traditional aspects such as the payment history of the loan applicant seeker payment, bank balance, e-commerce purchasing, travel size, and expenditure patterns. It capitalizes on the optimization of emergent technologies and digital footprints like social media, email, and internet usage to corroborate if a potential borrower qualifies for the loan.

An in-depth evaluation of the borrower profile helps in improving the chances of decent loan dispersals. Moreover, it also aids in safeguarding banks, NBFCs, and financial institutions by extending them relevant and meaningful data rather than the average data that most credit scoring agencies extend.

Grievance Mechanism

However, with the global businesses galloping towards digitization and remotely-operated virtual offices due to the COVID-19 pandemic, the risk of data manipulation, theft, and sabotage has also skyrocketed considerably. Therefore, the need to enact and execute critical data privacy laws to safeguard and streamline the data collection process is of vital importance. In the recent past, there have been several instances of users suffering from various grievances such as loss of credentials or compromise of data that occur due to negligence on the part of lending companies.

This led to Google red-flagging and removing of money-lending apps from the PlayStore as they failed to comply with the regulations established by the Reserve Bank of India to ensure data safety for countless users.

Moreover, there are a slew of elements that are essential for delivering alternate data models to practical fruition. Most importantly, consumer consent and synergetic collaborative modules will emerge as the standardized features for all alternate credit companies to adhere in the new normal. While traditional credit scoring models commonly utilize only about 8 to 10 variables for assessing an applicant’s credit-worthiness, new-age alternate credit models can optimize over 500 data points collated from several sources such as consumer's utility, rental, insurance, and other bills payments history, social media usage, employment history, travel history, e-commerce, government transactions, and property records.

New-age credit lending platforms are slated to be the harbingers of a novel fintech vista that flourishes by leveraging a vast surfeit of alternate data points to empower countless users towards financial inclusion. At the same time, they also offer lucrative investment prospects for retail investors who can capitalize on the massive market opening. Investing in new-age lending apps will directly accelerate the financial inclusion process as companies will be better equipped in addressing the various needs of the underserved.

The author, Rohit Garg, is CEO and Co-founder at SmartCoin. The views expressed are personal

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