The Digital Lending In India is a Growing Trend: Here Are The Reasons Why

Now our life has become digital and we are relying heavily on the digital measures available to make our lives easier. You can certainly expect the digital measures to transform your life in a way that is highly convenient for us. The digital lending in India is getting highly popular and there are several reasons why the lenders and borrowers are selecting the digital lending solutions and why they are appreciating this medium. According to the numbers the digital lending platforms are growing in popularity and more and more borrowers are turning to digital lending. Let’s learn here why this platform is so popular.

Reasons why the digital lending in India is so popular:

• The new age customers are much more tech savvy and they are doing everything online now including shopping, banking. They do not want to turn to the traditional lending solutions because the traditional lending solutions are time consuming, and they have to undergo so many hassles to submit loan application, get the kyc done, and also wait for the assessment process to take place. However, with the digital lending being there the credit risk management process takes up lesser time to get completed.
• The digital lending platforms prefer using the alternative credit scoring solution that would make the lending process hassle-free. The traditional lending platforms rely on the traditional credit history and data which the first-time applicants might not have. This would mean that their application would be rejected. But when it comes to digital lending in India the alternative data makes the process simpler and it offers a smarter view of the borrower’s financial habits and financial status. Therefore,  the digital lending platforms are gaining popularity.
• The digital lending in India is getting popular because of another reason which is, it allows the lenders to reach out to the people who reside in remote towns and villages and where there is no branch available. But with digital lending being available anyone can access these lending platforms without having to worry about geographical barriers. On the other hand the lenders to can extend their territory as they can access more customers digitally and get the credit risk management process done digitally as well.
• The digital lending process is much smoother, secure thanks to the alternative credit scoring solution and it absolutely ideal for the lenders and the borrowers. Things are bound to get smarter with the digital lending, as there is less time involved, it is cost-effective, and it is also more convenient for all.

The above mentioned reasons do show why the digital lending is popular and why the lenders and borrowers are turning to this platform. In the near future the digital lending will become the preferred method of lending.  

Why Alternative Credit Scoring is Rising in Popularity?

The traditional credit data is what the lenders resort to whenever they have to process the loan applications from the applicants. The problem with traditional credit data is that it has limitations that are hard to overcome for those borrowers who do not have any traditional credit history. Especially for the first-time borrowers and people with no documentation, would find it hard to be approved for the loans they are hoping to get. However, with the advent of the alternative credit scoring this issue is finally solved. The alternative credit scoring is getting popular because it offers a host of benefits. Let’s learn more here.

Reasons why alternative credit scoring is so popular?

• The alternative data offers the biggest benefits to people who are borrowing for the first time and has no traditional credit data. With traditional lending process they will never get approved for a loan, this would be a hindrance for them. But when one has access to the alternative data they can easily apply for loans and get approved. The data enrichment system allows the banks and other organizations to access the accurate alternate data that can help them assess these people more accurately and offer them the loans they need.
• The alternative data offers a better perspective, this can be better than the traditional credit data. The reason being that the traditional credit data gets the information from some traditional sources, and these sources offer a partial view of the customer’s financial status. On the other hand the alternative data can offer you the best solutions as it draws financial information from multiple sources, and this is data captured in real-time. This offers a wholesome view and offers a real time credit score.
• The banks and the businesses can make quicker decisions because there is alternative credit data available. The automated process and  alternative credit scoring makes it easier for them to access a customer profile and analyze their financial behaviors and pattern and this will finally help the businesses to assess the applications faster and thereby speed up the lending process and expand the customer base.  
• The traditional credit data does not provide an accurate view of the customers, and thereby one cannot get the profiling right. However, with the data enrichment system in place now accessing accurate credit data is possible and therefore, the banks and the lending organizations can get the profiling right; This would help in easing the decision making process.
• One of the biggest reasons to turn to alternative scoring is that it helps in boosting the credit risk assessment process and helps the organizations get real time credit score. This enables the banks to be sure about the customers they are dealing with and this makes the process more secure.

The above mentioned benefits of the alternative credit scoring make this system so popular among the people. Take advantage of the alternative scoring solution to make your lending more secure and faster.

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Importance of Alternative Data in Loan Underwriting

loan underwriting

When people apply for traditional secured loans, banks and lending institutions check the credit score and other financial details of the loan applicant. It puts those Indians at a disadvantage who have do not have a proper credit history or even a banks account. As most of these people are from remote or rural areas, it prevents them from an opportunity to get a loan and get financial help. Thankfully, banks and financial institutions have started implementing alternative data for their loan underwriting process. Let us see how alternative data has changed the underwriting process.

Alternative Data for Loan Underwriting

Alternative data is the data generated by a user on online platforms and the internet. The financial and lending institutions will ask permission to access the alternative data of the loan applicant for the loan underwriting process. Here are some examples:

• Bill payments: Details regarding the payment of any type of bills like mobile recharge, insurance policy, rental charge, loan EMI, utility bills, etc.
• Social media interaction: The data regarding your presence and activity on different social media platforms.
• Location data: Your location history is also taken into account under alternative data. Your travel routes, places you visited, and transportation options may be collected.
• Online shopping transactions: Your activity on e-commerce platforms, shopping history, wish lists, most searched shopping items, etc.

These are some of the alternative data points that financial institutions collect for the loan underwriting process. This data was analyzed to determine the loan applicant’s behavioral patterns, financial habits, and other preferences that can significantly affect their credit underwriting process.

Effectiveness of Alternative Data

Banks and lending institutions need various tools like artificial intelligence algorithms and machine earning models if they plan to use alternative data for the credit underwriting process of loan applicants. As this field of application is still new, thus there can be a certain element of error in the results. The lack of a historical dataset makes it harder to ascertain the results of the credit risk assessment process using alternative data with a hundred percent guarantee.

Still, it is an innovative way to determine the creditworthiness of a loan applicant as it uses new criteria that are more readily available to the user. The availability of cheaper smartphones and the internet has allowed many people to go online and explore the World Wide Web. The increase in connectivity has led to the generation of more alternative data about loan applicants. Here are some of the benefits of using alternative data for the underwriting process.

• This process can be done remotely. People living in even rural and far-flung areas can apply for this through online channels.
• The process is mostly automated and asks for the basic details of the loan applicant. They only need to provide photos of their government identity documents along with the alternative data. The credit underwriting process can then begin.
• The use of alternative data makes the underwriting process faster and more accurate.

From these points, we can see that the use of alternative data allows more people to have access to lending and financial facilities. It also makes the customer base of banks and lending institutions more diverse.

What are the steps that you will find in a loan underwriting process?

Mortgages are tools that help borrowers to get money from banks and other financial institutions for their needs. Whether it be for buying a car or home, health emergency, education fees, or any other such demand, people generally consider taking out loans to pay for them. It is because these expenses require a lot of money which is not readily available to most people. While applying for a loan, the borrower has to undergo the loan underwriting process first as it helps the banks or digital lenders to determine the creditworthiness of the individual. The following steps are carried out in this process.

Here is an overview of the steps of the loan underwriting process:

• You need to get pre-approved by the lenders first: Even before you apply for a loan, you can go to the bank and digital lender to get pre-approved for the loan. In this process, they use the current financial information that you provide to ascertain if you are fit to receive a particular type of loan or not. It is like a pre-check-up that is done even before the loan underwriting process starts.

• The verification of your submitted financial details: After getting pre-approval, you can apply for the loan and submit all the documents and information asked by the bank or digital lenders. The loan underwriting process begins when they start verifying all your financial details. Your credit score, credit history, income sources, bank account details, evaluation of the collateral or assets, insurance policies, investments, and all other types of financial activity is checked. It helps the banks and digital lenders to analyze the creditworthiness of the individual.

• Checking the liabilities of the borrower: After verifying the financial details, the banks and digital lenders also check for the liabilities of the loan applicant. The credit history is analyzed to see if the borrower can pay back the loan within the time limit. The banks and digital lenders analyze if the borrower makes consistent payments of bills and whether they have any outstanding debts on their record. They also check if the loan applicant has applied for any other loans or credit during the loan underwriting process. This data helps the banks and digital lenders to determine the financial condition of the borrower.

• Deciding on the loan application: This is the last stage of the loan underwriting process where the banks or digital lenders decide on the status of the loan application. Here are a few different categories that can be given.

• Denied: Your application may be denied due to various risk factors found in the credit underwriting process.
  • Suspended: Your loan application may be suspended if you have not submitted all the documents or if some financial information cannot be confirmed for the credit underwriting process.
  • Approved with conditions: In this option, the loan application is approved but with additional conditions that the borrower has to fulfill to avail of the loan amount.
  • Approved: The loan application is approved when every document is verified, and the borrower is deemed creditworthy for the loan.

These are the stages followed during the loan underwriting process done by banks and digital lenders.

What are the different digital lending models available to customers?

Digital lending has become widely popular since the beginning of the pandemic when banks and other financial institutions were under lockdown. Both startup fin-tech companies and large tech corporations were able to grow during this period. Even though the lockdown has been lifted and banks have started normally operating again, many people still prefer getting loans and credit from digital lending platforms. Here are the different lending models that customers can look out for.

Check out these different digital lending models available on the market:

• Online lending applications: These digital lending platforms offer their services through online channels or mobile applications. The entire process is digital and automated on these lending applications. Thus, customers do not need the help of any person and can follow the instructions mentioned in the lending application to apply for a digital loan. Many startup fin-tech companies fall in this category and they provide small loans to people for their needs.
• P2P Platforms: These types of digital lending platforms are more common in the market. A P2P digital platform helps to connect the individual, who is looking to apply for a loan, with the financial lending institution. The platform plays a key role as it becomes a medium for both parties to engage with each other. These platforms also provide additional services like credit risk assessment, payment options, recollection services, etc.
• Social media and e-commerce platforms: As digital lending became more popular, social media applications and e-commerce platforms also introduced credit systems within their frameworks. Although it was not their main business model, they used their large networks and distribution channels to attract people to use their lending and credit systems although their credit risk assessment and other processes are similar to the online lending platforms.
• Lender searching platforms: One can also find digital platforms that are dedicated to helping individuals get a suitable digital loan from the correct lenders. These platforms use various algorithms and models on the individual’s financial data and then match them with the appropriate financial lending institution. The platform generally charges a fee from both parties for providing this service.
• Mobile network money lenders: These digital lending platforms are similar to social media and e-commerce credit platforms. The mobile network company collaborates with a lending partner for giving out digital loans to its network users. The mobile network company provides this service to all its users where they can conduct transactions and apply for credit from the mobile network application.
• Supply chain lender: This lending method is available only to businesses and small companies. They can avail of a loan from their distributors for the purchase of required goods in advance. This helps them to avail goods for their inventory even if they lack some funds for the complete payment of the delivery. They should ensure that they pay back within the allotted timeframe or their next delivery of goods can be put on hold by the distributor.

These are some of the different types of digital lending models available that provide credit to people and businesses.

Check out these processes which can speed up the loan underwriting process

Financial institutions have started implementing various web technologies in the previous decade. This has resulted in the financial sector becoming more swift, efficient, and inclusive. From the loan application, loan underwriting, and even the loan approval process, each step has become advanced with the help of various innovative solutions. Here are some processes that have made a major positive impact on the lending market.

Inclusion of digital documents and alternative data in the loan underwriting

In the past, a loan applicant needed to carry a lot of paper documents for identity verification and the underwriting process. If the applicant failed to produce any of the necessary documents, they were not considered for the loan approval. Even if they submitted all the paper documents, the loan underwriting process used to take a lot of time. This was a disadvantage for any borrower who needed the loan amount urgently for an emergency. The loan application also weighed a lot on the credit score of the individual. This made it harder for new credit users to get a loan because they lacked a solid credit history.

However, the scenario has changed a lot. Applicants can now provide digital documents while applying online for the loan. This makes it convenient for many people living in remote areas in the country as they do not need to travel with their original paper documents. Apart from the inclusion of digital documents, alternative data is another innovative solution introduced in the lending market. If any loan applicant lacks a high credit score, the lending institution can use alternative data instead for the loan underwriting process. This helps many people to get loans easily at more suitable terms and interest rates.

Introduction automation and data analysis in the loan underwriting

Previously, all the steps of the loan application and underwriting process were done manually by employees of the bank or the lending firm. This is why the credit risk assessment of the loan applicant took a long time. Nowadays, most lending institutions have started using online services and solutions to make these processes faster. Many algorithms and machine learning models have come up that can analyze the loan applicant’s data credentials and check their creditworthiness. The introduction of such automation and data analysis in the loan underwriting process has made it swifter, inclusive, and transparent. These solutions allow credit risk assessment of the applicant to consider more factors apart from their credit score like the alternative data.

The lending institutions also use data analysis for more than just the credit risk assessment process. They can use it to map out the factors that can help more people from remote areas to access loan services. It can also detect the parts where automation can replace the manual processes to make the loan underwriting and approval process more effective.

We can see that these two innovative solutions have made the lending market more accessible to people, especially from remote and rural areas. This is why most banking and lending institutions have started implementing them in some ways in their credit underwriting processes.

The use of alternative data has made digital lending swift and simpler

More people in our country are getting access to the internet and enjoying the benefits that are provided through digital connectivity. In this pandemic where moving outside one’s home was severely restricted, people have become aware of various online solutions that have made their daily life more convenient. One of the sectors that have been slowly implementing more online services is the finance sector.

When it comes to getting loans, the previous process was too lengthy. Banks and other lending institutions took a lot of time to verify the documentation and conduct credit risk assessment procedures on the loan applicants. Moreover, people from rural India often lacked a proper credit history or up-to-date documents and were thus deprived of formal loans. But with the introduction of alternative data solutions, these problems are
being attended by the financial authorities.

Alternative data solutions have made the distribution of credit more inclusive

Apart from individuals, even small businesses can now get credit from lending institutions with the help of alternative data. The implementation of these solutions makes digital lending more fair, secure, and inclusive. More deserving candidates and businesses that previously got rejected due to their lack of credit history can now pass the credit risk assessment process and get their loan amount.

We can see that the beneficiaries of alternative data solutions in loan underwriting are from all sections of Indian society. But people from the lower-income margins have benefited the most. The use of alternative data along with the swift underwriting and loan approval process allows these people to gain loans quickly. This helps them a lot incase of any financial emergency.

Checking creditworthiness has become more accurate with the help of alternative data

In the formal loan application process, the applicant has to provide a list of documents and collateral (depending upon the loan) to pass the loan underwriting and the subsequent process. Individuals and businesses which lacked any important documents were deemed a credit risk because they did not fulfill the traditional criteria. Thus people were forced to get loans from informal options like moneylenders and be a victim of high-interest rates.

This situation has changed now as banks and digital lending platform have started using alternative data solutions for their credit risk assessment process. This has happened because the accessibility to smartphones and cheaper internet has allowed people to leave a large pool of data under their name. Loan providers are leveraging this data bank of the loan applicants through alternative data solutions. By analyzing these data sets which comprise of the applicants’ online spending patterns, social media
activities, and other forms of unstructured data, digital lending platforms can gauge the creditworthiness of individuals more accurately.

We can see the positive impact that alternative data has had on the digital lending situation in India. It has allowed more people to avail of loans through official channels and made them a part of the formal credit system.

Credit Underwriting Process in Banks: What to Know?

Applying for a loan full of expectations that you would get approved and get the money in a couple of days, and then be notified that the bank rejected the application must be a disheartening experience. Especially when you know people who have gotten approval on bigger amounts, it might confuse you regarding what went wrong or, what went against your favor. What stands between you and your digital loan? To understand that you need to understand how the credit underwriting process in banks take place and what you could do to change the outcome. 

The credit risk assessment process: 

When you submit your loan application, the financial institution immediately starts gathering your financial information. You had to submit several documents with your application as required by the lender, and that information along with other information that would be collected from the bureau and all of that would enable the lender to assess your creditworthiness. 

Basically, the credit risk assessment takes place to find out whether you are capable of returning the money that you are borrowing. Your financial stability is required for getting approval from the lender. 

Your credit score plays a significant role here, if your credit score is high then your chances of getting that loan is also higher and vice versa. However, many factors impact the credit score. Your payment history does play a crucial role in deciding your credit score. If you have made all payments on time then that would go in your favor, but a missed payment or, a couple of missed payments can lead to a bad score. Furthermore, too many hard inquiries might have a negative impact. So, you need to be aware of that. You also need to be aware of the credit mix. 

Staying aware of the underwriting process can truly help you improve your chances of getting a loan. 

Managing credit scores is essential to clear the loan underwriting process

When we face some financial issues we often end up applying for a loan, the instant gratification that comes with it is undeniable. However, the process that starts from submitting a loan application and getting approved by the digital lenders is a long and complicated procedure one that takes time and undergoes some complications. The only way your loan could get approval is if the credit risk assessment goes in your favor and for that, your credit score needs to be high. If you are deemed worthy post the assessment then you would be granted the loan. So how to manage your credit score?

How to take care of the credit score for the credit underwriting process?

• Keep track of your credit score, this is very important for you to know where do you stand in terms of your credit score. You can search for the due procedure for getting a copy of your credit score and go through that to understand where do you stand exactly in terms of your credit score. If it is really low then you need to be aware of that and take steps to ensure that you are improving your score before making that application.

• Stay away from too many hard inquiries. Although occasionally making hard inquiries is not going to affect your score, if you are on the other hand making too many hard inquiries in quick succession then that could hamper your score to a great length. So, you should limit your hard inquiries, to save your credit score for the underwriting process.

• If you have too many debts then you must repay those debts, before you can make any move towards obtaining a new loan. If you have too many loans then take out a loan and pay of all. This way you can lighten the load.

Keeping your credit score in check is essential for ensuring it is high enough to secure that loan you are aiming for.

How your Creditworthiness is Assessed

Applying for a loan and getting approval is a process that is full of a good measure of stress and anxiety. Whether it is a bank, or, a fintech that you have approached for the loan they are not going to lend the money unless they assess your creditworthiness. This process is mandatory and at the end of which you get your approval if you are considered eligible or, not. You are familiar with the term, but do you know anything about the process?

Here’s how they check Credit Risk Assessment!

When it comes to creditworthiness, two factors are taken into account one being your ability to pay back the loan along with how likely you are to pay back the loan. The credit score(300-900) plays a big role in the process and CIBIL, Experian, Equifax and CRIF High Mark are the agencies that are in charge of generating the credit score based on the data shared by the organizations. There are several parameters such as your payment history, credit enquiries, credit utilization, credit mix, on the basis of which the credit score is decided and the better your credit score is, the easier it is for you to get the loan, it does play a crucial part in the credit risk assessment.

Now the criteria would always vary and the institutes might have their own parameters which they would like to factor in during the process.

The inclusion of alternative data

The problem happens when a customer does not have enough data for getting a good score, or, even any score. However, now many institutes have started resorting to alternative data to assess the creditworthiness of such customers. The data is gathered from your mobile transactions, bill payment history and other such sources.

Usually the factors that are taken into consideration are your financial ability, non-banking credit history that might include your mobile bill payment pattern, or, even negative incidents like a bounced check.

In fact now the digital lenders are giving preference to using a mix of both traditional data and alternative data to get their assessment done, as it enables them to get a complete picture of the person they are about to lend the money to.

If you are interested in learning more then check the full blog here at: https://www.algo360.com/heres-how-your-bank-assesses-your-creditworthiness/