How Fintech Companies are Shattering Myths About Blue Collar Loans
The credit industry in India is geared towards lending to high income people in the area of personal loans. The low-income person or blue collar worker often has difficulty accessing credit from the formal financial system run by banks. Considering that over two-thirds of India’s labor force can be classified as blue collar, this is a segment whose credit needs need to be understood.
A worker is generally a semi-skilled person who earns less than Rs 30,000 per month. These people work in various industrial sectors including manufacturing, textiles, logistics, automotive, pharmaceuticals, security, etc. and contribute significantly to the country’s economic growth. Various jobs in the service industry – including retail, last mile delivery companies, courier companies – also hire blue collar workers as drivers, delivery people, and more.
The percentage of blue collar workers is only expected to increase in the workforce with a downturn in the economy generating limited employment opportunities. It is estimated that less than 5% of this workforce has access to formal credit.
Outside the formal credit umbrella
Banks and other formal financial institutions prefer to provide loans to the highest paid people, with salaries above 25,000 rupees / month and preferably in areas closer to urban areas. A person who earns Rs 15,000 / month will find it difficult to obtain a loan from a formal source. Small towns and rural areas face a different set of issues such as inaccessibility to a formal financial institution and lack of knowledge of the options available to access loans.
This opens up other lending channels with many people in the low income group taking loans from pawn shops or family / friends. Interest rates paid to pawn shops can go as high as 60% per year, forcing many creditors into debt.
Improving access to credit through technology
Fintech companies are targeting this underserved segment due to increasing digital penetration in India. Low-budget smartphones, very low data rates, and government policy on digital services have resulted in many more Indians becoming Internet savvy. India has more than 500 million Internet users and more than 95% of these users access the Internet through a mobile phone. Thus, digital lending platforms are well placed to reach this segment by also offering products to individuals in urban / remote areas with less income.
But how do fintech companies cope with the risks that mainstream financial institutions have traditionally associated with individuals in low- and middle-income groups? Higher default rates, unreliable information provided and difficulty locating are some of the risks cited when lending to this segment. FinTech companies have taken these risk factors into account while reaching out to people outside the formal credit umbrella.
Reassess risk factors and break myths
While reassessing risk factors and designing products to suit the needs of blue collar workers, fintech companies have also shattered many myths associated with lending to this segment.
One of the main reasons for excluding this segment has always been the unavailability of easily accessible information about the individual. Checking work history, credit history, and other background checks were difficult for blue collar workers. The slow acceptance of CIBIL scores and frequent job changes add to the risk when trying to decide whether a candidate is creditworthy.
The scenario has now changed with an increase in the online activity of candidates who can be analyzed and a better understanding of CIBIL scores. Digitization has made it easier for businesses to access data that was previously difficult to access for background checks. Social media activity and online profiles on various sites also provide useful data that helps determine an individual’s creditworthiness.
Shubh Loans has developed its own credit score to assess creditworthiness taking into account many other factors besides income and CIBIL score. This has helped the company understand customer behavior and develop tailored loan products for this segment. This credit score is also intended to educate individuals on available credit options and maintaining credit health for easier access to credit.
The second reason banks avoid lending to this segment is the high rate of default due to lower income. A combination of employment and credit background checks, ongoing repayment monitoring, and creditors’ credit rating education have helped fintech companies mitigate this risk. The size of loan tickets is also smaller than that of bank loans to allow easier repayment.
Shubh Loans has observed a trend of better repayment rates with lower income groups compared to higher income groups, thus shattering the myth that lower income people are more likely to default.
Online loans through apps also eliminate reach issues when it comes to remote locations. Cell phones also provide location information which helps track individuals if necessary. The paperwork and time required to get a loan is also minimal. The more favorable policy will ensure that FinTech companies are able to offer credit solutions entirely online, thus reducing costs for everyone involved. 100 percent online loans will be accepted more widely, sooner rather than later, allowing more opportunities for financial inclusion.
Fintech companies are making a difference to a large population that has been underserved for a variety of reasons. This is just the start with more opportunities resulting from increased customer awareness and digital penetration. With easier access to credit, the quality of life of many blue-collar workers can be significantly improved.