The borrower's ability to pay from their bank accounts—denoted by income, balance and saving trends, shows the financial ability of the borrower. The higher the ability, better the result.
When applying for a loan, be it from a bank, an NBFC or a fintech, especially for the first time we all have to go through meticulous paperwork and completion of various formalities.
This is done so that banks and other financial institutions could assess whether the borrower is eligible for the loan or not. Depending on our credit score, lenders approve or decline the loan. These decisions are usually based on two assessments— the borrower’s ability to pay and his/her willingness to pay (which is measured through the borrower’s creditworthiness).
What is creditworthiness?
Creditworthiness is a number measured through one’s credit score which ranges between 300 and 900. It is an assessment of how the borrower is likely to pay back the loan.
CIBIL, Equifax, Experian, and CRIF Highmark are the four agencies in India that provide their proprietary detailed credit reports and score for every individual. Amit Das, Founder and CEO of Think Analytics says, “The higher the score, the better the lender’s confidence in the borrower. However, note that the scores could be different from different bureaus.”
By RBI mandate all bureaus need to provide at least one free credit report annually through their respective websites. Also, several intermediary agencies also provide free credit reports by partnering with these bureaus.
Das adds, “These data sources are supported by Machine Learning (ML)-based decision-making systems, which benchmark the data received to generate a more holistic credit risk assessment for a potential consumer.”
Credit scores derived from Alternate data incorporates various new factors;
- Financial ability of the borrower: The borrower’s ability to pay from their bank accounts—denoted by income, balance and saving trends. This shows higher the ability, better the result.
- Non-banking credit history and payments: These payments and credit history offer significant insights into the borrower’s behaviour. For instance, Das says “a post-paid mobile bill indicates a small risk taken by the telecom company on you, and the repayment behaviour therein can be suggestive of your overall financial habits.”
- Non-banking transactions and assets: Wallet and UPI transactions are now becoming a proxy for banking spending patterns/transactions. Alternate data includes information about the borrower’s assets (investments) and risk coverage that helps in understanding how well-organized the borrower is financial.
- Negative incidents: Recent bounced cheque or penalties around minimum average balance (MAB) could have a negative effect. Das says, “Lenders are quite wary of such incidents and may not easily extend credit as a result.”
Industry experts say, in today’s India, as millions of people look to the future post-COVID, alternate data-based credit can help unlock the potential of a young, educated and aspirational workforce eager to get ahead in life.