The World Bank’s Global Findex Report 2017, its latest edition of this report thus far, has an encouraging statistic for India—more than half (55 percent) of new accounts opened globally are from India.
By Anirban Majumder
The World Bank’s Global Findex Report 2017, its latest edition of this report thus far, has an encouraging statistic for India—more than half (55 percent) of new accounts opened globally are from India. Yet, banking is not inclusion, as any objective insight into the country’s state of economic reach will demonstrate. Since 190 million Indians are still unbanked, it is important that this population too has access to a future that is fiscally sound. For many Indians then, the challenge is to be financially included while not necessarily being part of a formal banking system.
To resolve the issue of inclusion and provide smooth & affordable financial services to the underbanked, the NBFCs have now started playing a key role. According to RBI, there are 11,522 Non-Banking Financial Companies out of which just 1.5 percent accept deposits. Most of the financial disbursements which take place through the NBFC route take the unsecured complexion. And these are mostly for personal finance directed at consumer goods and services in the main.
If trends are to be seen, today credit is not just a via media to aspirational fulfilments of the individual, it is a booster dose for the industry. Almost half of all electronics sold in India is on credit. Clearly, credit to first time borrowers forms a significant part of this mix and financial inclusion efforts world be better served by organizations who can build this constituency as a viable and stable customer unit.
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For a first-time borrower, lending protocols and strategies are markedly different from those which address users with a credit history or a credit score. The question, therefore, is simple: is there a new dynamic whereby such new borrowers cannot be disadvantaged and at the same time professional agencies are also not short-changed for their efforts at mitigating financial exclusion in India? With personal loans becoming a sought-after product in the first-time borrower segment, lending organizations are reposing trust in a person with no credit history.
While this requires using innovative and custom-developed tools and strategies to ensure repayment, disbursal, and other compliances, this is a welcome trend in India to drive the financial inclusion agenda amongst the unorganised and the unbanked. Consequently, first-time borrowers can take full advantage of a formal, robust, regulation-firewalled ecosystem, something that would be welcome novelty to this category.
By moving the needle beyond traditional ‘credit-scored’ consumer finance and microcredit, professional NBFCs can profitably serve vast unbanked populations such as those extant in India and help societies towards attainable financial inclusion. According a 2010 McKinsey study, there were more than 2.5 billion people without access to formal financial services.
Today, that number has gone down to 1.7 billion, as per the Findex study. Part of the credit for this must go to developments in the digital domain, reflected in India by the Aadhaar stack and its linked KYC functionalities. For NBFCs, factors such as social media verification, community validation protocols, and so on, are more substantive than the formal and traditional mores of credit history verification. The use of data-driven decision support tools is helping lending agencies with a higher realization of good credit and is also ensuring receivers’ adherence to repayments and a healthy credit use.
In India, a host of players, including telecommunications firms, small finance banks, payment banks, and financial technology companies, are harnessing technology to reinvent traditional business models and offer faster, cheaper, and more convenient financial products and services to underbanked and financially unrepresented people.
The goal of financial inclusion is not just the responsibility of the state. As private players develop agile and effective constructs for mobilizing ever increasing numbers of ‘beyond the pale’ populations, it is but natural for experimental models of lending to come into play. This will yield results, many of which should be encouraging, but the first few steps are important. No matter what.
(The author is CFO, Home Credit India. The views expressed are the author’s and not Financial Express Online)