Access to Credit: The Gateway to Financial Inclusion in India

By admin | Feb 16, 2021

About 90% of India’s population still struggles to access formal modes of credit. In their time of financial need, they are often rejected by banks and hence turn to money lenders and other unauthorized modes of lending that give them the money they need but at very high-interest rates that can exceed 100% annually.

Reasons for not getting a loan

But why are such a large number of Indians, despite being salaried individuals, unable to apply for loans in banks and other formal lending institutes? This can be attributed to 3 major factors:

  • Absence of credit history

Many of these people that struggle with getting a loan are often rejected because they have no credit history i.e. they have no formal borrowing history and thus have no CIBIL score. Banks prefer someone with a good credit score because this gives an assurance that the individual will repay the loan on time. Often, if an individual does not have any credit history, he or she is asked to provide collateral in order to access the loan, which many cannot bear. Thus creating a vicious cycle of not being able to afford collateral and therefore not get a loan.

  • Loans and collateral

Due to the nature of the borrower, in this case, someone who has no credit history, banks often ask such individuals to provide collateral when applying for a loan. Since the banks do not have enough information on the borrower, collateral makes lending more secure. However, because these individuals come from weak socio-economic backgrounds, most of them do not have the luxury of having security they can pledge.

  • Small loan amount

Since these individuals take loans to meet their immediate financial needs, they often apply for loans of a small amount. For example, an individual applies for a loan of Rs 20,000 to meet the expenses of a recent medical emergency. A bank will most definitely not approve his or her loan for such a minuscule amount.

Why? Because banks have high overhead costs to run their branches, which are meant to provide other financial services apart from lending, they can not dedicate their staff to processing high volumes of small loans in the long run. And because of this, they tend to discourage loan applications with small amounts. Hence, many of these individuals face rejection from the bank and turn towards informal modes of lending that gives them the loan amount they need but at a much higher interest.

Creating financial inclusion through lending apps

While banks are still the first choice when it comes to loans for many Indians, there’s another contender in the market. Online lending loan apps have changed the lives of many individuals who otherwise struggle with getting credit in their time of need. Lending apps don’t just depend on an individual’s credit history but capture their data from their digital and analogue footprint to make an assessment of an applicant’s creditworthiness. They also allow first-time borrowers to build their credit history through which they can be eligible to avail larger loans from banks and other financial institutions in the future.

Besides being a safe and secure mode, lending apps are also very convenient. They are fully digital and can be accessed via an individual’s smartphone, without having the need to travel to a bank. Online lending apps are changing the face of credit access in India. They are providing a service to these individuals that would otherwise be taking high-interest loans from money lenders after being rejected by banks. With lending apps, the individual now has the power to take control of their finances. He or she can avail credit in their time of need without having to take on unnecessary stress. Lending apps are the way forward to creating a creditworthy India.

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