Fintech firms,NFBCs and banks are now collaborating to push the agenda of digitising India and are tracing the digital footprints of customers applying for loans. The new form of credit rating includes outlining the customers’ GPS locations on their smartphones, supervising their SMSes, studying their online shopping histories, and locating their Facebook activities to get an insight about their personalities and reliability. So, what does it mean for a small business looking to avail a loan?
Small businesses or SMEs suffer from what is called as a ‘thin-file’ where the information available is not enough to come up with a lending decision. In some cases the information provided may not be reliable. Digital records are now more unified and time-effective than, say, physical pan card copies, or API integration enabled GST payment data is more convenient to examine than the numerous hard copies of balance sheets and income statements. Most lenders are therefore using psychometric testing and digital verification to evaluate their own lending, moving over traditional metrics.
Finway Capital claims to be focused on loans for SMEs and CEO Rachit Chawla says, “We are testing and developing comprehensive automated in-house credit rating mechanism using various algorithms and Artificial Intelligence (AI). We do trace digital footprints as it authentically tells us accurately about the characteristics, behaviour, integrity, background, aspirations, hobbies, likes etc. about a borrower instantly which ultimately tells us about the borrower’s intentions and ability to repay the loan.”
Chawla believes that parameters such as tracking a smartphone user’s online activities are definitely an integral part. “It showcases the kind of person the borrower is and the kind of conversations he does with what stature of people,” he adds.
Delhi based DMI Finance’s co-founder Shivashish Chatterjee explains how NBFCs are working with the Fintech firms towards the same objective. “It is the Fintech firms that act as the front-end for borrowers, collect whatever data they deem relevant and then pass the application and associated data to us, the lender. Some collect ‘alternate’ data, such as SMS, location information and social media interactions, while many of them do not.”
MSMEs were a focus on this year’s Budget announcement. Stressing on their financial growth, Finance Minister Arun Jaitley had said, “Use of Fintech in financing space will help the growth of MSMEs. A group in the Ministry of Finance is examining the policy and institutional development measures needed for creating the right environment for Fintech companies to grow in India.”
Chatterjee adds that the fear of MSME lending has been based on a lack of transparency and lack of data. “MSMEs that have successfully provided easy-to-consume and verifiable data have never had difficulty accessing credit. What Fintech firms are doing is making it much easier for lenders to verify the authenticity of it.”
If technology is helping lenders arrive at a decision, many would be uncomfortable in letting such players get access to their life. “Privacy concerns are something that we take very seriously. The only way to assuage these concerns is to be completely transparent about what data we need from our applicants, get their consent upfront for collecting such data and then ensure that any data which is collected is used purely to inform a business decision on the application. Applicants are free to share as much or as little data as they choose,” says Chatterjee.
While traditionally banks in India have verified the authenticity of loan seekers through physical background checks and much paperwork, it looks like the ritual is going to monumentally change soon. After all, with commercial banks in India having over $1 trillion of outstanding loans, as per the RBI, it is now crucial for financial institutions to be absolutely sure that their loan applicants are able to repay the loans. The rising popularity of Fintech firms is then a no surprise.
“There is good reason for banks to be hesitant about lending to customers today as gross NPAs in the system stand at decadal high of 9.6% (of advances),” says Ashwini Anand, Founder, Monsoon CreditTech.
Anand adds that the technology-friendliness of MSMEs is improving drastically over time and this can be good for small businesses who feel the dearth of institutional forms of credit. “Already about 16 million have an online presence. Demonetisation, introduction of UPI and possibly most importantly, the introduction of the GST have forced MSMEs to start embracing technology. Once they go digital, we can easily underwrite credit to them using a combination of financial data such as balance sheets, P&L statements, T-Account statements, Credit Histories, and alternate data such as the transactions they undertake with their vendors and suppliers,” says Anand.
With this vast amount of information, Fintechs also shoulder the responsibility to ensure measures for cyber security for themselves as well as their clients. Anand explains, “We use bank level security. We use a 256-bit encrypted SSL connection and then we also have a next generation firewall that can alert us if any malicious source is trying to access our data online. This is on Microsoft Azure – a cloud computing service – that has its own set of protections. We also have an intrusion detection system, an anti-malware system, and the data too is stored on the hard disk in an encrypted form. There are also security measures to prevent web application flaws like cross-site request forgery attacks. There are other similar steps that we take to avoid online breaches.”
The lenders maintain that this unconventional method of verification is done with the full consent of applicants. “Checking an applicant’s online or phone activities will always be done with their consent. If there is no permission of the user, we will never coax or blackmail them. There is no system of personal credit rating in India whatsoever. Mere paperwork does not determine the capacity as well as the intention of the loan user to repay it. In fact, 60% of my consumer base is new to credit so how do financial institutions even know that these inexperienced applicants will ever return the money,” questions Monish Anand, the founder and CEO of Datasigns Technology.