Today, digital revolution has swiftly transformed Indians' life. There has been plethora of new-age services that were non-existent few years back. As a result, the average citizen has become more aspirational, and financial goals once considered unrealistic have now become more possible to achieve. The only area where we have been found wanting is in the inclusiveness of this progress.
All segments of our society have not been able to get the fruits of these advances in equal measure.
Unfortunately, this disparity is more obvious in the financial services segment. We have seen several new banks being granted licenses, and all the older banks have increased their reach by opening new branches in untapped geographies. But in spite of these developments, there is a large chunk of borrowers who do not have bank accounts or not able to produce the necessary documents to avail of a loan. This is hampering India's credit inclusiveness, resulting in stagnancy.
There have been a number of attempts to get more and more people into mainstream banking, with the launching of no-frill accounts and other enticements but the results have been mixed so far. We have seen a large number of new accounts opened in the last three to four years, but the quality and depth of those accounts were not at par. These accounts were technically zero balance accounts, so the low balances were not disobeying any guidelines technically, but the balances indicated that the purpose of the accounts (to get the account holders to save money in these accounts and use these accounts for transactions) was not being completely served. There is great scope for improvement in the inclusion of more people in banking activities. A very important aspect of banking is loans. When it comes to credit inclusion, we have to cover a lot of ground to get more people to access to speedy credit in the right sizes.
The use of technology can correct this situation, and fintech will be the game changer. Let us discuss a few possible ways in which fintech can be used to get credit to the marginalised segments more easily:
Financial literacy – India lags many other economies when it comes to financial literacy. Simple yet useful concepts like the multiplier effect of money or the power of compounding are alien to many people, as is an understanding of slightly more complex areas like money markets, stock markets and different instruments. Fintech could work on financial literacy as the first step towards inclusive banking. This will not only help in credit inclusion but help borrowers manage their credit effectively.
Variable loan sizes – Not all loan applicants require large loans. With its sheer ability to bring agility and collaboration, fintechs could help design smaller loan sizes which would have smaller repayment tenures and possibly lower rates of interest as well. The loan sizes could be calculated according to the earlier financial behaviour of the applicant.
Better products – Fintechs are able to use other realistic yardsticks from the data at their disposal to ensure that the credit appraisal mirrors the reality more closely. This enables better products to be designed which more accurately match the specific requirements of the marginalized borrower.
Security waiver – Because fintech would have access to large amounts of data, it might be able to get useful data which could permit credit appraisal to be done in a different way. For example, linking of the data of a farmer's monthly sales to the local agricultural market might help a bank to offer a collateral-free small loan to him.
Greater visibility of options – Different banks have different loan products. But most marginalised borrowers do not have a complete view of the different loan products available. They might at best walk to the nearest branch or the branch where the hold an account, if at all. But they are neither aware that there are several ways of applying for loans nor do they have an idea of all the loan options available. An aggregator app developed by a fintech could make it possible for any borrower to take a broader view.
Help of peers – For those who do not fit into the traditional bank's profile of the ideal borrower, help is at hand from Fintechs who have created peer to peer lending platforms. These bring the potential borrower in contact with individuals who have built up their wealth and are now looking to earn interest income by lending parts of their investible surplus.
The world of banking is set for big leaps forward in the near future. Increased offtake of credit will make the banking system more robust, and getting credit to the people who do not have access currently will be the biggest achievement of fintech. Channelising efforts toward credit inclusion will be a robust foundation and can result in greater contribution to the economy from consumers across all segments.
The writer is MD & CEO of Rubique