Embedded Finance: Making loans available to new-to-credit rural customers

Rural credit seekers continue to reel under the high interest rates and unfair practices despite the increase in access to technology.

Embedded Finance, loans, new-to-credit rural customers, banks, rural India. MasterCard, Financial Literacy Index, financial inclusion
As not having credit prevents access to credit, it becomes more difficult for new-to-credit customers living in rural areas to get loans sanctioned.

Despite the government’s focus on making formal credit accessible to rural areas, there are some rudimentary flaws in the lending process that traditional banks find hard to overcome. The bluntness of India’s growth story becomes clear once one looks beyond metropolitan cities.

As a result, rural credit seekers continue to reel under the high interest rates and unfair practices despite the increase in access to technology.

As not having credit prevents access to credit, it becomes more difficult for new-to-credit customers living in rural areas to get loans sanctioned.

Moreover, there is a lack of proper physical infrastructure in rural India – only 5.2 per cent of India’s 650,000 villages have bank branches even though 39.7 per cent of the overall branch network of Indian banks are in rural India. Financial literacy also remains low in this region.

According to MasterCard’s 2015 Financial Literacy Index (Asia Pacific), India is placed at a dismal 60th place. When combined, these factors result in the financial exclusion of a large bind of the Indian population.

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With this context, Rajat Deshpande, CEO of FinBox describes the state of rural credit, credit gap and causes for exclusion. He also shares his insight on how to prevent this situation by adopting Embedded Finance (EF) that further reduces the barriers to access for new-to-credit customers and enables innovation in financial services across below-tier cities.

Lack of access to formal finance

About 40 per cent of Indians do not have access to formal financial services. The unavailability is mostly prevalent in rural areas. Only 41 per cent of farmers have access for formal credit but still rely on informal credit sources.

There are a few factors that contribute to this. One is the poor banking infrastructure. Up until a couple of years ago, banks deployed only 16 per cent of their total ATMs in rural areas.

Another, perhaps more major reason, is that most rural loan seekers are new-to-credit. This means they have no credit history to show, and no formal documentation. So it becomes harder for lenders to assess the likelihood of default. What informal lenders do in this case is add a default premium to hike up the interest rates,

Banks can’t do this since they’re regulated by the government. Instead, they request additional documents and frequent visits by the borrower (leading to higher borrower-side transaction costs), and demand immovable collateral as a guarantee – which many rural NTC (new-to-credit) borrowers don’t have.

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Role of EF in improving access to credit

Embedded Finance narrows this credit gap in different ways. It enables alternative data based underwriting i.e. assessing borrowers with the data they actually have, such as mobile device data which includes apps, texts, device location, call logs, and contacts – particularly helpful considering rural borrowers don’t possess formal credit data.

Embedded Finance providers also customise loan application processes within the customer-facing platforms that borrowers are already familiar with. It leverages platform data for a better understanding of the customer, making the process guided and simplified. This reduces the effort needed for digital discovery and makes it easier for borrowers to access loans.

It’s also important to note that there has been a major increase in the demand for small loans over the last three years, alongside a growth in NTC customers from non-tier 1 cities.

This points to a clear need for small, ‘sachetised’ loans outside of urban India. Our Embedded Finance platform leverages customer data from the customer-facing platform it’s embedded in, and assesses it to provide small loans at flexible terms suited to rural borrowers.

Benefits to the banking sector, borrowers, others

Borrowers gain increased access to credit through alternative data underwriting, which helps them build a credit footprint. This makes banks less averse to lending to them – in effect, financial inclusion is a win for everyone. Those who need credit get it, and banks get access to a whole new customer base, and an opportunity to scale their operations.

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How to deepen financial inclusion

Steps like small lending, short tenures, alternative data building in vernacular/consumer friendly language, etc may be used to deepen financial inclusion in rural areas.

It’s also enabling seamless, fully digital loan application processes. Platform data is used to make the process guided and simple, reducing digital discovery efforts on part of the borrower.

Customer experience is now front and centre, which has resulted in customisation of the credit product (in terms of ticket size, tenure, repayment amounts), as well as the entire loan lifecycle experience (multilingual experience across touchpoints).

“At FinBox, we are seeing in action how Embedded Finance and digital lending are bringing credit to those who have long been underserved by the formal banking system. Digital platforms and mobile phones are enabling last mile access, while digital footprint data is being used to improve customer targeting and risk assessment,” Deshpande says.

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