Most banks do not lend to customers with a credit score below 750, which is considered poor. Such customers make for about one-third of the personal loan segment, according to a recent Bloomberg Quint report. Fintech companies are hoping to cater to such customers by filling the gap. Besides, millennials with low credit scores are turning to fintechs for loans, say experts. A recent report from CASEe, a fintech firm, said 64% of its demand for loans in 2018 came from the 21-30 years age-group. Disha Sanghvi asks four experts whether it is healthy for fintech companies to lend to such consumers?
Interest rates need to account for a higher default rate
—Navin Chandani, chief business development officer, BankBazaar
Fintechs are trying to cater to a segment that banks are unable to serve or have stayed away from. Various customer segments have different profiles. A consumer might be a millennial, below the age of 35, who may be new to credit. There may be a consumer who is 50 years old but may have a low credit score because of a bad credit history or one who has an outstanding payment of an annual fee on a credit card that he thought he had closed.
Depending on the profile and their risk capacity, fintech firms are creating propositions to attract customers, and pricing the risks in the rate of interest. It is unhealthy for the fintech if they don’t analyse and have segment-wise interest rates. They have to be very clear with their data analytics and price for the risks. If they price the risk well, the reward is good. If they go wrong in pricing the risk, they will be in trouble. Therefore, the interest rates need to account for a higher default rate. Those who get this mix right would be the winners.
Managing risk and keeping costs low is the key for fintechs
—Parijat Garg, senior vice-president, CRIF High Mark
A credit score is an indicator of the creditworthiness of a customer or the likelihood of a customer defaulting on a loan. A customer with low credit score doesn’t get a loan from traditional lenders since they find it too risky to lend to such a customer.
Fintech companies and a few other lenders see this segment as an untapped market opportunity. Fintechs use digital tools and alternative data points in addition to credit score to keep their costs low and draw more comfort about the customer. They also balance the higher risk of possibly not recovering a loan from a few of these customers by charging them a higher interest rate. For example, a customer with a credit score of 600-650 may get a personal loan at 18-20% from a fintech firm, while a customer with a score over 750 may get 10-12%. Fintechs might also cap the loan amount for such customers to manage its exposure.
In a nutshell, it is about finding a niche market while managing risks and keeping costs low.
Fintechs need to be careful and not ignore due diligence
—Lovaii Navlakhi, managing director and CEO, International Money Matters
Fintech companies are aiming to scale their businesses in the space of short-term loans. Finding customers quickly is sometimes more important than finding the right ones. In the quest to lend more, and get more customers, they start cutting corners. While the economy is booming, this works and vindicates the lender’s decision to ramp up; it’s when the tide flows out that you discover who’s swimming naked.
For the customer, she finds a super smooth loan approval process with limited paperwork. She starts using the short-term loan for productive needs and is soon lulled into believing that speculating with borrowed funds increases return on investment.
While we do understand the shift to digitalisation, due diligence is grossly underrated. Technology works when it has to sift large volume of data; fintech companies which are not in the race to become the burning phoenix of the industry will be better served by remembering the adage: slow and steady wins the race.
Fintechs give collateral-based loans to those with low score
—Satyam Kumar, co-founder and CEO, LoanTap
Fundamentally, one should be able to differentiate between no score and low credit score. In case of no credit score, if there is no loan and there are other credentials which makes an applicant qualified for a loan, then it is absolutely okay to give a loan to them. But if it is a low credit score applicant, that means there are some negative traits.
There are some fintechs that are consciously trying to walk with people having low credit score and make them understand the importance of good credit score and then bring them from bad to good credit score.
Most of the personal loans are unsecured in nature and no fintech gives an unsecured loan to people with a bad credit score. Fintechs that give loans to applicants with a low credit score work on collateral-based schemes.
Generally, all fintech companies give unsecured personal loans to good credit score applicants or one who meets the eligibility criteria despite having no credit score.