Shankar is 39 years old and is a factory worker in Bangalore. He has two children one of whom aspires to study further to become a computer hardware repair expert. Shankar encourages his son but is painfully aware of the cost that would involve. He knows he will never get a loan from a bank. He has had to pawn his motorcycle to pay for his children’s school fees, and he is still repaying the amount with a hefty interest attached.
Shankar is just one of the millions of Indians who is excluded by the Indian banking system when it comes to loans. Short-term or long-term, small or big, obtaining personal finance has long been the privilege of the higher income strata. Banks have rigorous checks and thresholds that first-time loan applicants need to pass. These include a sterling credit history and work profile, certain salary levels, and unblemished trustworthiness. Banks traditionally use Credit Information Bureau (CIBIL) scores to vet a potential customer seeking a loan. To be classified as an individual who is “above risk” one needs to have a score of 700 and above. In a country where almost 190 million people are yet to make the leap from biscuit tins to a bank account, this is asking for a lot. In fact, it’s near impossible.
For India’s low and middle-income workers, obtaining a loan in this scenario is unthinkable. Since establishing creditworthiness and trust are primarily based on these two factors they do not show up as ideal customers for traditional banks. People like Shankar end up borrowing much-needed money from unorganized sources like pawn shops, moneylenders or chit funds at exorbitant interest rates, which leave them feeling financially insecure and emotionally stressed.
Hearteningly, this scenario is undergoing a tectonic shift. The year 2017 was one that India’s FinTech sector will remember with pride. This is the year that FinTech received over US$ 200 million in funding in the first six months alone according to NASSCOM. It’s the year that saw the alternative lending industry burst onto the scene with over 225 companies being founded in the sector in the year. Armed with a broad, but deep, range of data and innovative sets of parameters these companies are bravely accomplishing what traditional banks hesitated to do – lend money to those who will never figure on the exclusive CIBIL-approved list. Primarily, this would be the lower and middle-income group of people who on paper are ineligible for loans and are therefore dismissed by banks.
So how do companies in the alternative lending space determine eligibility? By going through employers for one. A recent study from Harvard has shown that “employer-sponsored financial products…are more efficient than market alternatives and provide clear and compelling benefits to employees.” Using already verified data available with employers, like confirmed background checks, for instance, alternative lending company PerkFinance is targeting this massive, untapped market that holds immense potential.
It helps that digital acceptance in India has been in lockstep with the progress of FinTech innovation. The demonetization of 2016 alone resulted in digital transactions going up by 55% over the past one year. The fact that India currently has the second largest number of Internet users next only to China is pivotal for alternative lending to function well. Leveraging India stack to the fullest extent possible the companies in this space rely heavily on components of digital infrastructure like eKYC, Aadhar, UPI, and Digital Locker among others to ensure a smooth and speedy loan disbursement process.
How does it work? Employers sign up and give employees the option to borrow at low-interest rates. With the entire process being done online there is minimal paperwork, and the employee also gets to build a credit history rendering them eligible for bigger loan amounts in the future. The employer has zero risk too, in the process, as repayments are made via deductions in pay. But that’s not all. The employer stands to gain from the financial security that employees experience. Higher productivity, employee loyalty and retention, and peace of mind are the priceless benefits that employers are guaranteed to receive in return for assuring the financial well-being of employees.
That’s exactly what Shankar did. He approached his employer who instantly offered him the money he required at an unbeatable interest rate. That was a year ago. Today, he has almost finished repaying it, and he is happy. And has no intentions of leaving his factory job for a long time to come.
Whether you are an employer or an employee, PerkFinance can help. Visit PerkFinanceand contact us to know more.