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This article is part of the essay series “Freedom to Know: International Day for Universal Access to Information 2024”.
Financial inclusion remains a critical and unresolved issue in India, with a significant portion of the population excluded from formal banking services. Traditional credit systems are locked into rigid traditional data points, which has alienated individuals without established credit histories and created inherent barriers to financial access. But as the digital age brings a wave of accessible data, fintech innovators are starting to rewrite the rules. These companies are developing new credit scoring models that democratize access to credit by leveraging alternative data sources such as utility payments, mobile phone usage, and social media activity. Access to information is at the core of these transformations and, when used effectively, can power breakthrough innovation and profound social change.
These companies are developing new credit scoring models that democratize access to credit by leveraging alternative data sources such as utility payments, mobile phone usage, and social media activity.
The true essence of innovation is not just the availability of data, but how it is used to promote social equity and economic empowerment. However, this transformation comes with its own set of challenges, with ethical concerns and data privacy at the forefront. The road ahead is full of hurdles, but the possibilities for building a more inclusive financial system are equally vast.
Understanding alternative credit scoring
Alternative credit scoring leverages non-traditional data sources such as utility payments, mobile transactions, and even social media activity to assess a person’s credit worthiness beyond traditional credit reports. By analyzing their digital footprint, fintech companies expand financial opportunities to those excluded from the formal banking system. In India, the need for alternative scoring is pressing as many people remain “credit invisible” due to informal work and lack of documentation. When traditional financing is not available, people often turn to predatory lenders, perpetuating financial insecurity. This change will not only democratize credit access but also pave the way for broader financial inclusion in emerging economies like India.
According to the Global Findex Database 2021, only 35% of adults had a bank account in 2011, highlighting long-standing barriers to financial access. The Reserve Bank of India’s (RBI) Financial Inclusion Index (FI Index) reflects a gradual improvement, rising from 56.4 in 2021 to 64.2 in March 2024. This continuing gap highlights the urgent need for alternative credit scoring models that can democratize access to financial services. It is for people who are currently excluded from the formal banking system.
When traditional financing is not available, people often turn to predatory lenders, perpetuating financial insecurity.
Alternative credit scoring in India is still in its infancy but is gaining traction. Rather than relying solely on traditional credit scores, lenders now have access to rich, consent-based, unstructured data. This data is entered into platforms such as CreditVidya, where AI and machine learning algorithms process the data to assess credit risk, even if the applicant has no traditional credit history. Juvo is another organization that leverages mobile user behavioral data to create a unique credit score. These scores open up new economic opportunities for individuals without formal credit history, providing access to resources that were previously out of reach.
Obstacles and blind spots
Alternative credit scoring offers a promising path towards financial inclusion, but raises important questions regarding privacy, data integrity, and regulation. Extraction of personal data, from mobile transactions to social media activity, requires stringent safeguards to prevent breaches and misuse, especially in a country like India where data security concerns are on the rise. Furthermore, the quality and reliability of this data varies and, if inaccurate, risks leading to lending decisions that are as unstable as the financial behavior the data is intended to capture.
In India, the regulatory framework is struggling to keep up with the rapid evolution of alternative credit, especially as vast amounts of data are being utilized. As countries deal with this new situation, it is essential to establish clear guidelines to ensure that fintech companies operate transparently, protect consumer rights, and adhere to ethical practices. .
The quality and reliability of this data varies and, if inaccurate, risks creating lending decisions that are as unstable as the financial behavior the data is intended to capture.
Despite the rapid growth of fintech and alternative credit scoring models in India, there is still no dedicated regulatory framework governing this practice. The sector is now looking to broader legislation such as the Credit Information Companies Act and the proposed Digital Personal Data Protection Bill 2022 for guidance. While these laws provide some oversight regarding data use and consumer protection, they do not specifically address the nuances and challenges unique to alternative credit scoring.
For example, the Reserve Bank of India’s Working Group on Digital Lending Report (2021) raised concerns that fintech providers are processing large amounts of consumer data without proper consent. The Digital Personal Data Protection Bill proposed safeguards around data collection, storage, and sharing, but as alternative credit scoring models evolve, more tailored regulations may be needed. Such regulations will ensure greater transparency, ethical practices, and consumer protection in the expanding digital lending environment.
A key trend going forward may be greater collaboration between fintech companies and traditional banks. However, a potential first step could involve banks experimenting with these models internally. Axis Bank, for example, has already started testing this approach to improve its underwriting model. By combining innovative strategies with traditional banking, these efforts have the potential to better address the needs of the unbanked.
The Digital Personal Data Protection Bill proposed safeguards around data collection, storage, and sharing, but as alternative credit scoring models evolve, more tailored regulations may be needed.
Technological advances, particularly in AI and machine learning, will further refine these alternative credit models, streamlining the lending process while providing increasingly accurate risk assessments. Finally, as fintech matures, there will be an increased emphasis on financial literacy to ensure new financial participants understand their rights, responsibilities, and the long-term implications of borrowing. It will become like this. This is not just a technological revolution; it requires educating, informing and empowering the public.
Future developments
For many individuals, these new financing avenues provide tools to overcome institutional barriers that have long constrained their financial aspirations. Traditional credit assessments often rely on rigid metrics that fail to capture a complete picture of an individual’s financial behavior and potential. In contrast, fintech solutions can leverage a variety of data, from payment history to social media activity, to create a more nuanced picture of a person’s creditworthiness.
This change has significant implications for economic empowerment. By recognizing the value of their digital footprint, fintech companies can not only facilitate access to capital, but also instill a sense of agency in people who have been overlooked by traditional systems.
With increasing collaboration between fintech disruptors and traditional banks, India is on the cusp of building an inclusive financial ecosystem where all citizens, regardless of their background, can fully participate in economic life.
This rethinking of creditworthiness reshapes the financial narrative, shifting the focus from simple risk assessment to a more meaningful recognition of economic potential. This fosters innovation, supports entrepreneurship and contributes to a more inclusive financial environment where individuals are valued for their abilities rather than limited by past exclusions. This shift reflects a real shift in the way society values economic contributions, and offers new opportunities for those who have traditionally been overlooked.
The potential for these alternative models will only expand as technology advances and regulatory frameworks catch up. However, it is not without its challenges. Data privacy and information authenticity are two major concerns that need to be addressed. But with increasing collaboration between fintech disruptors and traditional banks, India stands on the cusp of building an inclusive financial ecosystem where all citizens, regardless of their background, can fully participate in economic life. Masu. This is not just about access to credit. It’s about reconfiguring core economic institutions and how data can play a key role. The foundation of these advances is rooted in access to information. Used wisely, it has the power to spark breakthrough innovation and drive meaningful social change.
Sauradeep Bag is an Associate Fellow in the Center for Security, Strategy, and Technology at the Observer Research Foundation.
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