Many countries including India, are aiming to create financial inclusion. Every second adult in the world is underbanked and lacks access to services like loans. About 1.7 Bn adults in the world are unbanked, that is they do not even have a bank account.
India is one of the world’s largest democracies with one of the fastest-growing economies; still millions of people here remain underbanked. Having a bank account and availing financial services are two separate things. While a significant number of people have enrolled and opened bank accounts in the past few years, a notable portion of the population about 191 Mn Indians over the age of 15, still don’t have any bank account or even if they have, they don’t utilise it for any of their financial needs.
The financial services of conventional banks are not readily accessible to low-income people in developing countries. Neither does the traditional monetary product match the needs of this segment. This group of people requires affordable and convenient services that could allow them to avail of financial services.
Catering to this segment is not a simple task. They represent many different markets, based on their livelihood, attitudes, behaviors, financial situations, and other factors such as lack of awareness about various financial services. Hence, there is a need to deliver experiences that are desirable to each different market.
Underbanked people usually tend to use alternative forms of financial services, such as non-bank money orders or non-bank check-cashing services and payday lenders to handle their financial needs. The number of underbanked people around the world remains high. Microfinance Institutions (MFIs) are trying to fill the gap by providing underserved/underbanked consumers with multiple financial services. Their aim is to reach those who are not normally served by the formal financial system.
New-Age Lenders – The Unsung Heroes
MFIs are the frontrunners to provide microloans or small-ticket loans to the underbanked segment. Since the beginning, the basic product of microfinance was ‘microcredit’. As per a report by SIDBI and PWC, this sector has been instrumental in creating opportunities for low-income households by providing credit access to 64 million unique live borrowers who were previously beyond the reach of traditional financial services. Currently, this sector has a total loan portfolio worth USD 1.785 trillion and loan disbursal is growing at a rate of 20% in terms of volume.
There is little doubt that fintech’s have the potential to address the financial needs of people. It is not just a buzzword but it’s bringing about real change across various financial services-products, processes and services. Fintech has taken center stage by making itself essential to customer-facing processes. From a larger view, it is driving financial inclusion in the country by creating lucrative opportunities for the poor and unbanked. By breaking hurdles such as lack of financial awareness, high-cost of traditional banking services, and policy-gaps, fintech is allowing a large number of Indians to be a part of the formal financial outlook.
Non-Banking Finance Companies (NBFCs)
NBFCs have been prevalent for a long time, however, they are pushing boundaries beyond traditional ‘credit-scored’ consumer finance and microcredit, NBFCs are now serving a vast underbanked population as well. They play an important role in financial inclusion by complementing the banking sector by supplying credit to the underbanked segments of society, especially to the micro, small and medium enterprises (MSMEs). NBFCs’ ground-level understanding of customers’ profile and credit needs gives them an ability to innovate and customize products as per the customer’s requirements.
All the new-age credit lenders share a common trait i.e. increased use of technology to lend securely to ‘New to Credit’ customers. Technology has become central to these new-age lenders, increasing the accessibility of their products and services to borrowers.
Technology is bringing new models of credit scoring allowing lenders to leverage data to assess risk; reach out to the borrower in case of delays, effectively predict high-risk customers, understand borrower’s behavioral patterns and take suitable action at an appropriate time. The future of the industry will be built on its ability to build new partnerships, develop new products, create new investment channels, and leverage technology to meet the demands of consumers.