By Arpit Ratan
The financial landscape has witnessed a significant transformation with the adoption of artificial intelligence (AI) in credit assessments. This shift aims to make credit more accessible, especially for small businesses and everyday borrowers who have traditionally faced barriers to financing. However, integrating AI into credit assessment processes poses challenges, including concerns about transparency, fairness, and the need to prevent unfair influencing lending decisions.
On May 15th, RBI Deputy Governor Swaminathan J cautioned non-banking financial companies (NBFCs) against over-reliance on algorithm-based credit models. While these models offer efficiency and scalability, they may lack transparency in decision-making processes, which can raise concerns about fairness, hampering efforts toward financial inclusion.
The Role of AI in Credit Assessment
AI-based credit assessment presents a promising solution to these challenges. Unlike traditional credit scoring methods that heavily rely on historical data and algorithmic models, AI can provide a more comprehensive evaluation of borrowers. It considers a wide array of data points, including income, spending patterns, social media activity, and other non-traditional sources. This approach offers a clearer understanding of an individual’s current financial situation, which is crucial for accurate credit assessment.
Transparency and Decision Making
Explainable AI models have features that provide insights into decision factors, aiding borrowers and financial institutions in understanding credit decisions and building trust. These tools provide rationale behind each decision point ensuring transparency and accountability. Additionally, AI-led credit assessment reduces inequalities from manual underwriting by configuring models with checks to prevent race, religion, or gender prejudice. Fairness-aware machine learning and bias detection algorithms further refine AI models, promoting fairness and equity in credit assessment.
AI Enables Sound Credit Decisions
AI can act as a human underwriter by not only making a final decision but also explaining all the details of the decision. The bank or lending institution can configure the AI model to create guardrails, ensuring it does not have racial, religious, gender or linguistic biases. This ensures that the model does not exclude deserving segments that truly need a loan. Moreover, AI’s capability to evaluate non-traditional data points enables financial institutions to extend credit to New-To-Credit (NTC), promoting financial inclusion.
This capability of AI to make transparent and sound credit decisions is particularly beneficial for the MSME sector, which faces challenges in availing loans due to heavy dependence on traditional loan processes. Financial institutions typically rely on MSMEs demonstrating their creditworthiness through evidence of digital financial transactions and property, which involve many manual steps and increase credit underwriting costs. This approach results in poor working capital reserves and impedes small businesses’ productivity and growth, ultimately damaging the overall economic growth of the country.
It is high time for Indian financial institutions to increasingly adopt and use AI-led credit assessment for MSMEs. This innovative approach looks beyond the traditional ways of credit and considers data such as total income, transaction analysis, work experience, and user behavior analysis, among other data points. AI can scrutinize these diverse data points more efficiently than traditional methods, providing a more accurate understanding of an MSME’s creditworthiness.
AI has the potential to transform credit assessment by making it more inclusive, accurate, and efficient. However, to realize its full potential, responsible innovation is essential. This includes ensuring transparency in decision-making, mitigating opinions, and integrating AI with traditional scoring methods. By doing so, financial institutions can foster trust, enhance financial inclusion, and empower more individuals and businesses to access the credit they need.
In conclusion, AI represents a significant opportunity to advance the fairness and efficiency of credit assessment processes, ultimately contributing to a more inclusive financial system.
Arpit Ratan is the Co-founder & CBO of Signzy. Views are personal.