Leveraging Alternative Data to Enhance Risk Assessment

Effective risk assessment is at the core of the lending business. Retail lenders have their own risk assessment models based on traditional frameworks. Meanwhile, technology companies are developing risk assessment models increasingly inclusive of new variables derived from data generated as a result on increasing internet and smartphone usage. These models provide an opportunity for lenders to expand their target audience to the previously unbankable population.

The business of sound risk assessment

Sound risk assessment requires adequate market knowledge, deep understanding of the customer, and robust systems to detect fraud and forgery.

Risk assessment is difficult due to multi-fold challenges, the most important of which are:

  1. Low coverage of credit bureaus: Just 43.5% of the Indian adults are covered by credit bureaus. The lack of a bureau record forces the lenders to reject the applications of more than 40% of the borrowers.

  2. High operating cost: Information about the majority of the Indian customers is unavailable and unverifiable digitally. Lenders are forced to perform verifications manually – field verification, phone verification, reference checks, etc., increasing the operating cost of risk assessment. Som ...

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