Over the past two decades, consumer lending has seen a major transformation. The key part of it was a shift from a “one-size-fits-all” approach in loan approval to adoption of credit score systems. But despite this transition, credit risk – the possibility of losses as a result of borrowers’ defaults – still poses a major challenge in lending to people with low incomes.
One of the key issues for lenders in emerging markets is that consumers typically lack documented credit history – or have no credit history – making it difficult to establish their creditworthiness.
Credit bureaus have long become essential to the economic infrastructure of developed countries but in the rest of the world, their reach is still rather limited. Existing data shows that national credit information bureaus cover only about 20 per cent of the adult population in India, and 30 per cent in China. In the latter case, the booming e-commerce sector has prompted major online retailers such as Alibaba, Suning and Tencent to create their own lending businesses, creating vastly different and often inconsistent credit scoring systems. China’s government has recently urged market players to adopt uniform lending criteria – but there’s a long way to go before their levels of sophistication and inclusion can match those in developed markets. In the meantime, vast numbers of potential clients cannot gain access to even basic financial products.
There is often a vacuum in the space between small – often unlicensed – lenders and the large consumer financers who cater to the middle class. The role of companies operating in this market, like Home Credit, is quite unique. Home Credit provides mid-to-low income groups and grassroots consumers with clear and transparent consumer lending services. Most of them are first-time borrowers with no or limited credit records, which makes it difficult for them to obtain a loan from banks which normally require this as a starting point. Yet many of these people can nonetheless be good, reliable borrowers. Home Credit understands this and works with customers to get them on the credit ladder, for instance starting with very small loans and a clear repayment plan to acclimate them to borrowing.
Our work with these previously unbanked clients who have below-average income and less education not only benefits them but the industry, and in fact the country, as a whole. Home Credit becomes a ‘credit generator’ of sorts, enabling our customers to begin to develop an official borrowing history, promoting financial literacy and ‘graduating’ these clients to the higher levels of the banking system. The expansion of consumer credit, in turn, can ease liquidity constraints, improve consumer spending patterns, expand the scale of the financial services industry and stimulate demand. That’s in addition to creating added value for retailing and sales partners.
It’s true that operating in developing markets is an opportunity, albeit one that requires additional investment in advanced data processing and risk management, secure IT systems and added employee training. But we believe that consumer lenders with access to western expertise should accept these costs and take the initiative, leading the way in financial inclusion for the under-banked.