In a country of 1.3 billion people the penetration of credit cards has been abysmal. The RBI data from October 2016 shows a bleak picture that the number of credit cards issued stood at 27.3 million. Compared to the 1.8 billion credit cards used by 200 million Americans, the difference is alarming.
One of the primary reasons for a lack of credit card penetration is the lack of credit scores for the majority of unbanked Indians. However, there should be sufficient data on the 51 million tax filers to issue 3 credit cards to at least 50% of those people. Therefore, the number of credit cards issued should have been around 80 million, so less than 40% of the potential market has been addressed.
On the backbone of Aadhaar, a rapidly digitising India will make credit profiling easier. There are many opportunities for enterprising founders to think about stitching financial data with alternative sources of information to provide better credit scores. India needs better solutions for the classic chicken-and-egg situation that current credit bureaus present – you cannot get a score without credit history but you cannot get a credit history without taking credit!
Alternative methods of credit profiling give a holistic picture of an individual by adding social, utility and other data to build a robust credit score. A randomly picked sample size can start the statistical process to create the initial scores. As the data and data sources increase, the scores get dynamic and smarter. The scores can be tested in different ways: either by back-testing the credit profiles that were created by the banks and verifying the performance of the scores with reality, or by testing the scores against the credit given to individuals and tracking that performance over a period of time.
A good statistician will collect the mountains of data to refine the algorithm and finally, with enough data, provide results that can be at par with those provided by the traditional credit bureaus. One of Artha’s star investments, Tala, is a start-up that did this the hard(er) way than I had suggested, and today connects over 10,000+ data points to provide an alternative credit score in seconds for microfinance loans.
Tala’s founder, Shivani, is an inspiration for founders thinking of alternative credit. I am personally hunting for an Indian startup that will take on the challenge of providing a credit score to the 98% of Indians that lack access to credit. If you are that team or know someone who is taking this challenge, ask them to reach out to me.
