The New Era of Credit Scoring is Here and it Cares Only About Millennials
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There was a time when the word “loans” referred to financial stress and in hush hush circles, it reflected your bad financial state. But well, aren’t we glad that we have moved past that time?
Today, Indians are more and more open to taking loans as a better financial decision. Be it EMIs for a new phone or a new house they are buying, loans are becoming a part of their spending culture. And this trend is seen more in millennials.
But there’s one issue here. Millennials are New To Credit, which means they do not have a prior credit history, making it difficult for banks to give them loans.
Well, hello startups.
The world of technology has not only made the access to loans easier but also brought in a new credit rating score for even those with no credit history.
Entrepreneur India spoke to founders who are building these credit scores about the changing credit scoring market in the country and why they focus on millennials.
The Current Scenario of Credit Rating in India
While analyzing the credit rating scenario in the country, experts believe that it is important to breakdown the segments of people applying for credit. Hrushikesh Mehta, Country Manager – India, ClearScore believes that first come the salaried middle class, a sizeable chunk of India's population, for whom the credit scoring environment is well developed. While extensively used by lenders while evaluating loan applications, the awareness among such consumers is relatively low. “To quote a few ballpark figures, while 300 million Indians have a credit report and between 100 to 150 million people apply for loans annually, only between 3 to 5 million people actually keep track of their credit score. Given the importance of credit scores in people's lives, from buying a house at preferential interest rates to paying for emergency medical expenses to children's education or sometimes even securing employment, the awareness levels definitely need to be higher than where they are today,” he said.
Mehta then turns his focus to the New to Credit segment that is people who have no prior loan history. For these people, Mehta said it represents a chicken-and-egg conundrum. “They are unable to get loans because they have no credit score and they have no credit score because they are unable to get a loan. There are however several fintech companies which are working with alternate data to resolve this issue and meet this need. By alternate data here, I mean SMS, mobile payments, social media data etc,” he said.
Awareness Needs to be Created
A gnawing problem with Indian fintech is that while the importance for these products is felt in the country, the understanding of fintech solutions is missing. Ranjit Punja, Co-founder and CEO, CreditMantri explained that recent studies indicate that almost 3/4th of the Indian adult population does not understand basic financial concepts, hence there is a huge opportunity to educate the customer. He believes that taking the digital first approach is the way forward. “In the last few years banks have stepped up retail lending in the form of personal and housing loans. To ensure there is no delinquency in the future, there is a need for availability of transparent credit models which can be utilized to the best effect by both lenders and borrowers,” said Punja.
All Eyes on Millennials
Most credit rating companies are turning their focus to millennials. They form a large chunk of the Indian population and their needs are growing day by day. While trying to manage their finances, they are open to taking loans. This has also led to the birth of many buy-now-pay-later companies or startups that cater to giving out loans only to millennials.
“Unlike 15-20 years back, India has become a lot more open to credit. People in their late 20s and early 30s are availing small-mid sized credit - either in the form of personal loans or in the form of credit cards. So it only makes sense for credit scoring companies to focus on this segment,” said Bala Parthasarathy, Co-founder & CEO, MoneyTap.
These are the people driving the workforce of India ahead and Punja believes that taking out time to educate millennials about credit at a time when they are thriving with ambition and are fresh to the workforce is key. “By knowing where they stand with respect to their own credit health, millennials will be able to make confident strides which will serve them well when they are looking to buy their own house or car in the near future. A credit healthy millennial ensures a future ready nation,” he said.
The Growing Need for Credit Scoring Companies
This brings us to the topic that while more and more millennials look to avail more loans how do they reach out to even get those loans, when they are missing an important criteria – their credit score. Here’s where the credit scoring companies come in. Parthasarathy informs us that today nearly one-third of the customers availing loans through new-age Fintech lenders are NTC. “We need better credit evaluation systems to enable them to have better access to instant, hassle-free loans,” he said.
Meanwhile Mehta puts out the equation simply as - The more the number of brands providing free credit scores, the greater the awareness in the space and the more the number of fintech players working on building credit scores, the greater the assistance to different segments of the population in getting a loan, thereby increasing credit penetration.