Credit Risk Model for Unbanked: Last-Mile Lending Enablement

Around the world, there are billions of people without access to structured and formal lending services. This category also includes those micro, small, and medium enterprises that struggle to stay afloat without timely financing.

Fintech has identified these segments to be on the brink of a financial revolution, but there is a tiny hitch. For instance, digital lending institutions need to regroup their position on mastering the tech, utilizing data in identifying potential borrowers. Nevertheless, some lenders have made some headway in adopting alternative data models resulting in a cutback of credit losses and doubled application approvals.

Post-COVID Credit Assessment for Unbanked Segment

The impact of lending and borrowing on small and medium businesses and informal segments like single structures, migrant populations & the unbanked segment is now seen as “Too risky.”

This scenario gives rise to crucial problem statements that need to be addressed by various players in the formal financial ecosystem as below –

• Lack of structured and verifiable financial behavior data for MSMEs, small retailers, and even single entrepreneur set-ups
• Physical KYC verification challenges, especially if the borrower's name details, address, or any other criteria are mismatched against available sources
• The financial inability of MSMEs to service and repay existing Loans (in effect) to avail any of the fresh or emergency credit
• The prevalence of manual processes in risks and credit assessment of lenders and banks increases the chances of fraud, errors, omission, loan data exception, and oversight
• Specifically, in the current scenario, as COVID 19 can be classified as an “ACT OF GOD,” this presents a rare loop-hole challenge for existing borrower data to be improperly / insufficiently benchmarked against existing lending product standards
• One of the most ignored segments is the unbanked and under-banked segment (who can be classified as without an active bank account or a transaction presence for a minimum of 6 months)

Credit Assessment Opportunities — Ecosystem Participation

• Alternate scoring entities and solution providers need to capture and capitalize individual data through Telecom, Utilities, Taxation & GST, Payments, E-commerce, and Location data
• Account aggregators will be a qualitative and quantitative complement disruptor for the credit assessment and provide holistic financial behavior data across participating Financial Information Providers (FIPs) and Financial Information Users (FIUs)
• Credit repair entities will have an essential role in ensuring the impacted segments have access and transparent understanding to repair appropriate credit damage due to COVID

So far, these pioneering efforts have sparked the unbanked credit assessment. They have brought forth massive opportunities for the sector, and the future looks promising.

Want to know more about enabling digital credit? Then write to us at business@m2pfintech.com

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