Governments globally have strived hard to usher in financial inclusion within their respective economies sustainably and responsibly. Yet, the undeniable truth is staring; most of the population has moved from being unbanked altogether to being underbanked.
However, this large chunk of people can maintain bank accounts, perform transactions etc., on their digital devices, all thanks to the digital revolution in the financial services industry. But they are still in the dark when it comes to obtaining formal credit and other essential financial products to qualify for being called financially included in the system indeed.
So, how does a nation strategise its lending processes in a manner that welcomes the underbanked population into the ambit of proper credit streams? How does a country solve the ordinary people’s problems of going door-to-door searching for a lender they can trust and be trusted simultaneously?
Enter collaborative lending – the next big thing in the lending landscape to transform how credit is forwarded to the underserved worldwide.
Let’s learn more about collaborative lending in detail below.
What is Collaborative Lending, and How Can it Extend Credit to the Underbanked?
Collaborative Lending works under a partnership model where different lending agencies such as banks, NBFCs and non-lending agencies such as telecommunication operators, payment service providers etc., come together to reach out to the users who continue to be untapped with credit access.
The non-lending partner provides detailed data and other information on every customer required by the lending partner to arrive at a sound lending decision. The lender partner funds the credit by using its lending license and provides under-writing services, which falls within their domain.
Two Major Roadblocks Lenders Face in Extending Credit to the Underbanked
The lending space is riddled with certain shortcomings that prove challenging for the lenders to cater to the underbanked in a viable manner. Here are two, most significant of them:
1. Insufficient Data
The whole premise under which a lender extends credit to the individuals is based on sufficient data about any collateral such as property or documented income such as salary. So basically, any trackable or searchable data about their financial background speaks something about their applicability and credibility for taking on more credit.
Sadly, much of the underbanked population lack sufficient credit history against which they can borrow from the lenders. Moreover, most of them may be hopping jobs and do not possess a formal salary slip since they don’t work in the formal economy.
Given the stringent eligibility criterion and regulatory guidelines, the current financial system lacks adequate infrastructure to absorb these people.
2. Small Ticket Loans
A typical banking organisation, NBFC or other lending agency have to factor in the ticket size of the loans being granted via them on the company’s bottom lines. This is because typically, higher the amount of loans being given leads to an increase in their profits and vice versa.
The underbanked generally opt for small loans that they can quickly repay, which does not sit well with the lending agencies as their unit economics go for a complete toss, leading to unprofitability. Much of the operations in these organisations remain labour intensive to date and carry fixed overheads. Forwarding small size loans acts as a deterrent to their business as well as overall profitability.
Collaborative Lending – How it Can Transform Lending to the Underbanked?
Collaborative lending is nothing short of a newly developing twist on the digital lending front, which can prove beneficial to all the stakeholders involved.
Here is a deep dive into how and why collaborative lending is a win-win for all parties and must be explored with more attention:
Efficient Process
The customer acquisition cost reduces considerably in collaborative lending since the partner agency typically provides the credit lead. Also, they are at a much better place to gather verified and validated customer data directly through the partner, making the process extremely efficient and inexpensive.
On the other hand, the lender funds the credit immediately through the partner who brings down fraud risk to a large extent.
Quick Loan Turn-Around-Time
The partners have enough tools and resources to piece together different digital footprints of an individual into a complete credit report in real-time, using technologies such as machine learning and artificial intelligence.
As soon as this is done, lenders can simply hop on to the next steps in their lending procedure which includes checking the applicant’s creditworthiness and then going ahead with the application right to the approval stage.
This process of assessing creditworthiness is streamlined and takes place in real-time without delay, leading to a quicker loan turnaround time.
Win-Win for Everyone
Collaborative lending ensures that each party become stalkers and can reap excellent benefits that they can take home.
The underbanked save an immense amount of effort and time in simply getting credit in times of need. In addition, the partners can increase their customer value and generate additional revenue streams doing so.
The lenders can leverage the benefit of accessing a new target market of potential borrowers and expand their customer base.
The Bottom Line
Collaborative lending is the go-to approach for extending credit to the underbanked due to its ability to convert a particular loan segment that lacks enough sheen into a profitable and healthy portfolio and turn it around completely.
It is being looked upon as a novel, innovative and sustainable approach that could bring in a new wave of growth for the lending ecosystem. Fintech revolution, digitisation, along collaborative lending models can be clubbed together to produce an excellent powerhouse for India’s lending landscape that can turn the tables for the underbanked.
Finezza offers a wide range of loan management services such as credit evaluation, bank statement analyser, analytics and various integrations can help businesses manage and streamline their lending practices much more efficiently. Reach out to us today for any questions.
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