As per the recent report by Fintech Association for Consumer Empowerment (FACE) 84 per cent of lenders in India now combine alternative data with traditional credit checks to assess borrower risk.
New Delhi: Traditional bureau credit scores have long been the primary factor in determining a borrower’s creditworthiness for retail lending. However, this often leaves many potential borrowers out in the cold, especially first-time borrowers without established credit histories. With the rise of alternative credit scoring (ACS) methods, banks and other non-banking financial institutions can now access a wider range of data points to make more informed lending decisions. This shift has changed the way credit worthiness is ascertained and loans are approved while contributing to a decrease in the default rates for many lenders.
According to Anand Agrawal, Co-founder & CPTO, Credgenics, alternative credit ratings represent a paradigm shift in assessing an individual’s creditworthiness.
“In contrast to traditional assessment methods that rely on limited bureau information, ACS uses a broader data spectrum to measure borrower reliability,” Agrawal added.
The key components involved in alternative credit valuations are:
Non-Traditional Data Sources: ACS contains data that overlooks traditional credit scores.
This includes:
Utility payments records (electricity, gas, water, etc.)
Rental payment history
Mobile phone usage and payment patterns
Bank account transaction patterns
Insurance coverage and investments
Income based on informal gigs – employment / business
Predictive Analytics: By utilising advanced data analytics, lending platforms apply machine learning algorithms to interpret vast amounts of data. The objective is to uncover patterns and predict the likelihood of repayment in ways traditional models cannot.
Risk Assessment Model: This helps to analyse the context behind the data. For example, a positive history of fast supply payments can demonstrate credibility even in the absence of a formal credit story.
As per the recent report by Fintech Association for Consumer Empowerment (FACE) 84 per cent of lenders in India now combine alternative data with traditional credit checks to assess borrower risk.
“By using a more comprehensive set of data points to assess a borrower’s creditworthiness, lenders can identify individuals who are likely to be able to repay their loans, even if they have a limited credit history. This can result in lower default rates for lenders, as they can more accurately assess the risk associated with each borrower. Additionally, by incorporating alternative credit scoring (ACS), lenders can significantly strengthen fraud prevention. By providing loans to individuals who may have been excluded from traditional credit scoring models, lenders can also help to increase financial inclusion and provide access to credit for a wider range of individuals,” Agrawal said.
This layered approach improves identity verification and helps prevent loan stacking or synthetic identity fraud.
