Don’t let uneven access to credit get in the way of Viksit Bharat

For India to achieve its ambition of becoming a developed economy by 2047, the country's formal credit ecosystem needs to rise sharply.
For India to achieve its ambition of becoming a developed economy by 2047, the country's formal credit ecosystem needs to rise sharply.

Summary

  • India needs to chart a path for small-ticket formal loans for underserved customers. Thankfully, we’ve had a data explosion that makes credit worthiness far easier to assess.

Unsecured lending has grown at 25% over the last four years, twice as fast as mortgage loans. In certain pockets, this growth came at the cost of borrower over-leveraging and loan stacking. 

Potential fraud has also risen sharply. 

This is especially true with young digital borrowers. The regulator predicted this risk way before lenders started applying the brakes and market exuberance began to ebb. 

That stance was vindicated by a spike in loss rates among lenders.

Despite its high growth, unsecured lending, with a penetration of 9% of India’s adult population, is low. This penetration (loans per adult population) is 173% in the UK and 259% in the US. 

The number of people covered by formal lending is simply much larger there. At its current rate, India will take 20 years to reach 70% credit penetration. 

Perhaps the biggest alarm is that India’s share of new-to-credit (NTC) customers in unsecured lending has reduced from 17% in 2019 to 10% in 2023 due to consistently declining approval rates. 

Also Read: When will global credit rating agencies get their assessments of India right?

India’s financial system is missing an opportunity to bring financialization to lower-income cohorts. 

To achieve the Viksit Bharat aim of a developed economy, formal credit needs to rise sharply. This will lower debt costs for unserved segments and raise economic prosperity, while opening new customer pools for the country’s financial sector. 

For GDP to grow 10 times, as estimated, the financial sector must grow 20 times.

There has been progress, though. 

In the last decade, India has managed to formalize banking access for almost the entire population. Digital payments have been democratized with UPI and Aadhaar. 

By one estimate, India has lifted 800 million people out of poverty “simply by the use of smartphones." 

This segment of the pyramid aspires to better lifestyles, quality education, access to healthcare and increased consumption. To make this a reality, these customers will seek formal credit, likely starting with small-ticket, unsecured loans. 

India’s mortgageable assets are beset with problems like lack of clear titles and difficulties in assessing the cost of property, etc.

Thankfully, lenders have an opportunity to build advanced risk assessment models to drive profitable growth in this segment. 

We are a data-rich country, which can serve as a path to becoming economically rich. Our digital public infrastructure is the envy of the world. We are generating massive amounts of data, even as we gain from low-cost smartphones and cheap data services.

Also Read: India’s drive to globalize Digital Public Infrastructure: Time to take stock

The new player in the game is alternate data. 

A data explosion over the past decade has enabled a ‘beyond bureau’ 360-degree view of the customer. Digital profiles on social media and e-commerce platforms, coupled with online spending patterns, can create a strong indicator of credit-worthiness (the hit-rates of borrowers through payment gateways are more than 40% and increasing, even in rural areas).

Through geospatial analytics, a financial institution can take better credit-risk decisions, by considering location-specific factors like the economic stability of an area, property values and local employment trends. 

There are over 4,000 indicators that range from socioeconomic and healthcare data to criminal records and use of hospitality services, apart from residential and civic infrastructure information. 

Further, satellite data offers detailed cropping and weather forecasts, plus soil and irrigation patterns, to assess farm outcomes. With merchant QR codes and the mass adoption of UPI payments, the smallest of business units have been able to show predictably consistent cash flows and hence credit worthiness.

Also Read: India’s sovereign credit profile has certainly improved: Here’s why

This is a big opportunity for credit underwriting among NTC customers, if leveraged correctly.

Our experience shows that transaction activity is not only the most widely available and authentic data source for small-ticket lending, it also offers the most predictive view of credit risk. 

Bank accounts are acting like the new credit bureau. Lenders who take a holistic view of customer profiles, instead of assessing only their digital footprint on e-commerce sites or social media, will fare better.

India must chart a path for small-ticket lending by making the most of its capabilities, ecosystem utilities and data. 

The financial services sector must re-imagine its proposition and capabilities end-to-end. Lenders must innovate. 

Perhaps, like intraday trading, we may soon see banks providing intraday loans at scale. It is time to relieve unsecured lending of its taboo.

These are the authors’ personal views

The authors are, respectively, managing director and senior partner; and managing director and partner, BCG. 

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