Avtar Singh is a decent man. He works hard, fourteen hours per day and six days per week to support his family. Avtar, 37, has worked for his current employer, a kirana store owner in Nangloi, on the outskirts of Delhi, since he was a teenager.
He stays behind the counter, takes deliveries, and shelves products. He sometimes also collects money from customers, local residents – who've bought groceries on credit. Avtar, moreover, helps his lala, the store owner, out with household chores.
Avtar is loyal to his employer, who helped him finish school and get married. His lala also helped him find the one-room apartment where he now lives with his wife, Nimmy, and his two children aged 5 and 4.
Avtar and Nimmy want their five-year-old to enrol in a local English-medium school. Nimmy is considering a part-time job at the same school, but public transport comes across as a problem. A little extra cash – for the school entrance fees, for a two-wheeler for Nimmy, and to waterproof their room before the monsoons – would really come in handy. Avtar Singh needs a loan.
This situation is far from unique. Hundreds of millions of hardworking, responsible, and essentially credit-worthy Indians are not served by formal or organised-sector financial markets.
For decades, the main recourse for cash-strapped Indians with less-than-stellar credit history has been local lenders and their ilk that charge usury interest rates (which can go in the triple digits as well). For instance, Avtar Singh has borrowed money several times before. He has taken salary advances between Rs. 5,000 and Rs. 15,000 from a local moneylender who knows his employer, This advance, plus a 10 percent charge, is meant to be repaid when Avtar gets his salary.
For example, if Avtar takes an advance of Rs 5,000, he has to repay Rs 5,500 when he gets his salary. He prefers to pay back in full when he gets his salary, which varies between Rs 18,000 and 25,000 per month. But that isn’t always possible. So, he sometimes rolls the loan over and repays over 3-4 months, keeping track of the credit charges as best he can.
Despite having successfully cleared every loan he has borrowed, Avtar has no formal credit history. Therefore, he has no access to slightly larger loans – amounting to 5-6 months of his income – which he now needs. This situation is far from unique. Hundreds of millions of hardworking, responsible, and essentially credit-worthy Indians are not served by formal or organised-sector financial markets.
Avtar is feeling the pain of what economists call “information asymmetry”. Organised sector players are unable to see what is self-evident to Avtar – that he is trustworthy – and are therefore unable to serve him. Therefore, Avtar and his peers have met their credit needs with alternative instruments, all of which have their own frictions and costs.
For example, gold-loans require people to save in the form of gold, rather than in better yielding financial instruments; loans from kinsfolk come loaded up with expensive non-market obligations; or chit-funds and "committees", which are scam-prone.
The financial revolution now underway is that technology is bridging that "information asymmetry", i.e. decent people like Avtar Singh are better able to show the world that they are indeed creditworthy. This is enabling them to better serve the ‘invisible prime’ borrowers such as Avtar or in other words, the people who are new to credit, have little credit history, or are temporarily going through hard times and are highly likely to repay their debts. In doing so, fintech lenders cater to people who don’t qualify for the best loan deals but also do not deserve the worst.
It was only recently when someone informed Avtar about an online lending platform called InCred. He was able to secure a loan of Rs. 1,00,000, enough to cover the school admission, a second-hand Honda Activa, and repairs for his roof. He will repay the loan in 24 EMIs of Rs 5,287 which is comparable to the re-payments he made in the past for his salary advance loans. These repayments are usually auto-deducted from his bank account. The cherry on the top was that he didn’t had to go through the exhaustive loan assessment process as everything was easily done from his smartphone with the touch-of-a-button experience.
However, there was not enough money in his bank account for the auto-deduction last month. Avtar paid his EMI in cash to a pick-up agent and was educated on how to pay his EMI online through the app on his mobile phone.
Today, fintech platforms are leaving no stone unturned to serve the 'unserved' borrowers in India. They are also making their loan products more flexible and customised for superior customer convenience. For example, we are witnessing a rise of novel loan products – including travel loans, medical loans, wedding loans, etc. – with every loan product understanding the different financial circumstances involves in such use cases and then, handcrafting the it accordingly to ensure maximum convenience. Now that Avtar has a formal sector loan, he will be on the credit bureau database. He can even manage his credit bureau record – in effect, his financial reputation – through apps that he can download on to his phone.
India has just stepped into a new era of growth and efficiency as digitisation continues to permeate people's day-to-day lifestyles. This development is eliminating the bottlenecks that were experienced earlier and is paving the way for a 'new' and empowered India – where everything and everyone is 'visible' and catered to.
(The author is chief executive officer and founder of InCred. Views are personal)