Why ‘Access to Credit’ is a Challenge to India's Financial Inclusion

According to data from the World Bank, India is home to nearly 190 million unbanked individuals who are left out of mainstream financial services. The main reasons for this are lack of credit history, low or no education, lack of language skills and commercially unviable geographies. It is a herculean task to reduce the number of financially excluded individuals as there is no apparent solution to this problem. The dream of making ‘Bharat’ a part of the mainstream, with access to financial products and, hence, to economic empowerment is still quite distant.

Credit Issue - The Financial Sector Deems the Unbanked Population Credit ‘Unworthy’

One of the greatest barriers in the way of progress is the scarcity of credit history on the part of the masses. Credit history is the data footprint one establishes by taking and repaying credit products. With low financial literacy and with no one to vouch for them, many Indians are unable to access their first credit product. No credit product or repayment history means there is no reliable data to assess whether a person has the intention and/or the ability to repay. The absence of this data equates to credit unworthiness.

Financial Illiteracy Makes the Inclusion Project a One-Sided Endeavour

Financial illiteracy is yet another challenge that hinders this Bharat mission for financial inclusion. Lack of access to banks or financial institutions is one thing, and being unaware of it is completely another thing. This means that even if the necessary infrastructure and services are in place, there will be little to enumerate tangible results due to scarce participation from the targeted audience, hence a one-sided mission. Communities in the hinterlands refrain from availing banking or lending services due to lack of proper education and awareness about finance, despite having access it.

This challenge is further compounded by a language barrier as large sections of Indians are not familiar either with English or Hindi, and struggle with understanding the financial jargons, getting discouraged from coming forward to apply for loans as a result.

Remedial Measures

Many of the issues discussed above can be eradicated by promoting mass financial literacy and educating the new generation along the same lines. It can fetch better results if a holistic financial curriculum is introduced at schools that can lay emphasis on topics such as credit history, loans, financial management, and banking. Another solution lies in making use of digital devices. Although a considerably huge section of the Indian population is digitally illiterate, the increasing use of mobile phones and digital technology can be leveraged to decrease the gap between them and the mainstream financial world. Financial institutions can also capitalise on the same to understand the unbanked population.

Another promising solution is in the use of Psychometric testing. Such tests help in determining behavioural traits that have a direct correlation with financial behaviour like intention to repay. Such tests can be done using simple questionnaires or game/video-based situations. This makes it user friendly and easy to do without appearing to be overly technical in nature. 

Biometrics is yet another old yet effective concept of establishing the authenticity of the borrower. The method is already used for several purposes to establish identity and honesty. The most prominent examples are the use of face recognition or thumb impression in smartphones to unlock the devices, and thumb impression to consent the use of Aadhar data. Several digital lending applications are also using videos and face matching to ensure authentic identification. Use of biometrics in polygraphs is a way to determine honesty. Such concepts can also be used to determine intention to repay. A device that can capture pupil dilation, pulse rate, body temperature changes during a loan application can help generate data points that can show intention of the borrower.

Both the techniques go beyond the financial behaviours to establish an individual’s profile based on their human behaviours. This concept is similar to the days when loans were approved by banks on the basis of interviews and intuition of bank managers, the use of digital media and artificial intelligence-driven algorithms make the approach quicker, unswerving and effective, thereby eventually helping the masses with guaranteed access to credit.

Conclusion

Credit is instrumental in economic empowerment and upliftment individuals, corporations and nations. Unfortunately, a large segment of the Indian population is not yet integrated into the fold and continues to remain isolated. This keeps them trapped in the cycle of poverty. As such, this chain of poverty has to be broken. A financially empowered individual can contribute to themselves and to the country quite significantly. Hence, the onus falls on the financial institutions of the country to formulate mechanisms for uplifting this financially neglected population by adopting an inclusive model.

The author is Founder and CEO, RevFin

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.