How Fintech Companies Are Busting Myths Related To Blue-Collar Loan Lending
The credit sector in India is skewed towards lending to high-income individuals, in the personal loan space. The lower-income individual or the blue-collar worker often finds it difficult to access credit from the formal financial system helmed by banks. Considering that more than two-thirds of India’s working population can be classified as blue-collar workers, this is a segment whose credit needs should be understood.
A blue-collar worker is typically someone who is semi-skilled and earns less than 30,000 rupees, monthly. These people work in various industrial sectors including manufacturing, textiles, logistics, automobiles, pharmaceuticals, security, etc. and are contributing significantly to the economic growth of the country. Various jobs in the service sector - including retail, last-mile delivery companies, courier companies - also hire blue-collar workers as drivers, delivery personnel, etc.
The percentage of blue-collar workers is only expected to grow in the workforce with a slowing economy generating limited employment opportunities. Less than 5% of this workforce is estimated to have access to formal credit.
Outside the formal credit umbrella
Banks and other formal financial institutions prefer to give loans to higher-salaried individuals, with salaries more than Rs 25000/month and preferably in areas that are closer to urban areas. An individual who makes Rs 15000/month will find it difficult to get a loan from a formal source. Smaller cities and rural areas face a different set of issues like inaccessibility to a formal financial institution and lack of awareness of options available to access loans.
This opens up other channels for lending with many individuals from the lower-income group taking loans from moneylenders or family/friends. The interest rates paid to moneylenders can go up to 60 percent per year, forcing many creditors into a debt trap.
Improving access to credit with technology
Fintech companies are reaching out to this underserved segment owing to the increase in digital penetration in India. Budget smart-phones, very low data rates and government policy on digital services have ensured that many more Indians are internet savvy. India has more than 500 million internet users and more than 95 percent of these users access the net through a mobile phone. So, digital lending platforms are well poised to reach out to this segment by offering products to individuals in urban/remote areas with less income as well.
But how do fintech companies tackle the risks that conventional financial institutions have always associated with the lower and middle-income group individuals? Higher default rates, non-reliability in terms of information provided and difficulties in tracking whereabouts are some of the risks that are cited when lending to this segment. Fintech companies have taken these risk factors into account while reaching out to people outside the formal credit umbrella.
Re-evaluating the risk factors and busting myths
While re-evaluating the risk factors and designing products that are suited to the needs of blue-collar workers, fintech companies have also busted many a myth associated with lending to this segment.
One of the major reasons for the exclusion of this segment has always been unavailability of easily accessible information regarding the individual. Verification of employment history, credit history and other background checks were difficult for blue-collar workers. The slow acceptance of CIBIL scores and frequent job changes added to the risk when trying to decide if an applicant is credit-worthy.
The scenario has now changed with an increase in the online activity of applicants that can be analysed and wider understanding of CIBIL scores. Digitisation has ensured that companies have access to data that was difficult to access earlier for background checks. Social media activity and online profiles on various sites also provide useful data that help in determining the credit-worthiness of an individual.
Shubh Loans has developed its own credit score to assess credit-worthiness considering many more factors in addition to income and CIBIL score. This has helped the company understand customer behaviour and develop loan products tailor-made for this segment. This credit score also aims to educate individuals about available credit options and maintenance of credit health for easier credit access.
The second reason why banks avoid lending to this segment is the high rate of default in repayments due to lower incomes. A combination of background checks on employment and credit, continuous monitoring of repayments and educating creditors on credit score has helped Fintech companies mitigate this risk. Loan ticket sizes are also smaller compared to bank loans to allow for easier repayment.
Shubh Loans has observed a trend of better repayment rates with lower income groups compared to higher income groups busting the myth that lower-income individuals are most likely to be defaulters.
Online lending through apps also eliminates problems of reach when it comes to remote locations. Mobile phones also provide location information that helps in tracking individuals if required. Paperwork and time taken to get a loan are also minimal. The more favourable policy will ensure that fintech companies are able to deliver credit solutions that are completely online, decreasing costs for everyone involved. 100 percent online loans will be accepted more widely, sooner than later, allowing for more possibilities for financial inclusion.
Fintech companies are making a difference to a vast populace that has been underserved due to various reasons. This is just the beginning with more opportunities arising from increased customer awareness and digital penetration. With easier access to credit, the quality of life of many a blue-collar individual can be vastly improved.
