Home >opinion >online-views >Helping India’s youngsters cross the credit chasm

India has the youngest population on Earth, largely because of the benefits of basic medical care reaching expectant mothers and infants after independence. Babies who should have logically died, didn’t—and had children of their own. India now has four times as many people as when the British left.

This phenomenon has alternatively been dubbed India’s “demographic nightmare" and also its “demographic dividend". The nightmare lies in providing sufficient employment. However, in industries where youngsters are a labour pool or are prospective customers, the dividend is apparent.

This dividend has also allowed a number of start-ups to flourish, even if they are just “copycats" of business models that have flourished abroad. The app economy has caught hold with the young, who use it for buying their apparel and their electronic gizmos online, which is a prospect older Indians baulk at.

Another area where start-ups have shown promise is in helping young Indians manage their entry to the credit market. Before deregulation in 1991, a credit card was almost unheard of, and the only people who took loans from banks were businessmen who had large amounts of surety to put up. This has changed over the years as the “never-never" economy of the West has made its way to India. The “never-never" economy ensures that you keep working throughout your life to pay off the equated monthly instalment or EMI on the loans you accumulate on the way. The old Indian rubric of saving up enough money before one goes out and splurges is long gone. That said, along with this surge, the non-performing assets (NPAs) in the lending portfolio of banks have expectedly gone up.

India’s credit system has only slowly been catching up with the West. We have taken much longer to create credit scoring systems, partially because we are such a large market in terms of the number of participants, and until recently, lacked a uniform way to uniquely identify each participant. This second issue has been largely addressed by Aadhaar, which makes sure that the Mr/Ms Indian applying for a loan in Bengaluru is indeed distinct from another Mr/Ms Indian in Bengaluru with the same name.

While we have barely scratched the surface of becoming a “never-never" nation, banks have had to tighten their lending norms in the wake of a large number of NPAs. Also, outside of credit card-linked EMIs, large banks rarely service loan applications that are smaller than 1 lakh. Servicing the smaller loans does not make sense for large banks since their embedded technology and legacy processing costs are too high to cost-effectively originate small loans.

To add to this is the quandary of “I can’t lend to you until you have credit history", which is uttered in the same breath as “I am unwilling to give you that credit history". This issue is a chasm faced by many young Indians when they join the workforce. They have not been around long enough to have established credit scores, but with a new job, have the purchasing power to service a small loan. Meanwhile, the glitter of the latest smartphone or motorbike beckons.

Enter a legion of start-up “fintech" firms that are trying to help youngsters cross this chasm with a business model based on providing loans to young Indians who have jobs, but don’t yet have credit. One such is NIRA, founded by Rohit Sen and Nupur Gupta. The duo has a combination of technology and business skills that allows them to offer a technology-based platform for young Indians to borrow from. NIRA lends small amounts—their maximum loan is 1 lakh.

The founders claim that their new technology and algorithms allow NIRA to lower loan origination costs than banks with legacy systems and processes. They focus on under-banked youngsters by following algorithms that allow them to quickly assess a prospective borrower. Their assessment covers whether the borrower meets a minimum threshold, while interest rate is a function of the risk associated with the borrower, and the loan amount is a function of his or her earnings.

Markets abhor chasms and seek ways to cross them quickly. NIRA’s founders are betting on being among the first to cross this one.

Siddharth Pai is founder of Siana Capital, a venture fund management company focused on deep science and tech in India.

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