As far as the way Fintech companies or private banks lend money to creditworthy individuals is concerned, much hasn’t changed.
The Union Budget 2019, which was recently presented on the floor of the House, lived up to expectations as far as overhauling the liquidity crisis in the economy is concerned. The budget, along with the RBI’s fund infusion since the collapse of IL&FS, has aided capital infusion, allowing lenders to flex more easily. As far as the way Fintech companies or private banks lend money to creditworthy individuals is concerned, much hasn’t changed. The process has undergone tremendous transformation ever since Fintech lending companies entered the scene a few years ago. The application process that once spanned 7-8 business days now spans just a few hours, thanks to Fintech lenders who’ve come in, leveraged powerful technologies, and made the loan process smooth, convenient, and most importantly, Smart!
In order to qualify for credit, a potential borrower is required to satisfy a set of eligibility parameters. After assessing these parameters, his creditworthiness is determined and a loan offer is subsequently made. The parameters that make for the broader set of eligibility criteria typically include an individual’s credit score, repayment history, income level, total outstanding debt balance, number of credit accounts, and the current monthly liability. Besides meeting the set criteria in accordance with the lender’s underwriting norms, applicants are also required to submit a bunch of documents that serve to verify his/her credentials.
Be it secured or unsecured credit, lenders adhere to the guidelines in determining an individual’s creditworthiness and accordingly make a lending decision. It must be noted that the interest rates on unsecured credit (predominantly including personal loans) are higher than the rates on secured loans owing to the absence of collateral or security. There exist secured personal loans too, and lenders offering this type of loans don’t usually perform credit checks – the loan amount and the asset’s value are proportionate.
Coming back to what announcements the government made regarding lending companies and potential borrowers, the Finance Minister announced the interchangeability of PAN and Aadhaar – both these documents can be used interchangeably while authenticating borrowers or using identity references for financial transactions. As for Fintech companies active in the unsecured/secured lending space, both PAN and Aadhaar were primary prerequisites to verify a borrower’s profile and obtain his credit report. On that front, lending companies do not have to look for alternate channels to verify their customers, especially after a lot of doubt was cast over the sustainability of the Aadhaar-cantered verification model.
(By Aditya Kumar, Founder & CEO, Qbera.com)