Page 39 - Banking Finance August 2025

A R T IC L E
ARTICLE
As of March 2024, the FI Index stood at 64.2, reflecting an Small Businesses: Many individuals, including young
improvement from 60.1 in March 2023. A key component professionals, self-employed workers, and small entre-
of the index is access to credit, highlighting the critical role preneurs, lack a recorded credit history. Traditional
of credit availability in advancing financial inclusion. Ensur- models fail to assess their financial reliability, leading
ing equitable access to credit remains essential for bridg- to their exclusion from formal lending systems.
ing financial gaps and driving sustainable economic
Disparities in Rural and Urban Credit Scoring Effec-
progress.
tiveness: Urban populations generally have better ac-
cess to financial institutions and credit-building
opportunities, whereas rural borrowers often
lack banking facilities, formal employment
records, and digital financial footprints. As a
result, rural credit applicants are at a disadvan-
tage, even if they have strong informal repay-
ment habits.

These limitations highlight the need for alter-
native credit assessment models that leverage
Figure 1: RBIs FI Index broader data sources, such as utility bill payments, digital
transactions, and behavioral analytics. By addressing these
Understanding Credit Scoring in India gaps, India can move towards a more inclusive financial eco-
system that empowers underserved communities with im-
Credit scoring is a numerical representation of a borrower's
proved access to credit.
creditworthiness, derived from the past credit behaviour of
borrower. It helps lenders assess the risk associated with Alternative Lending and Its Growing Im-
lending money to an individual or business. Banks and fi-
nancial institutions report borrowers' loan repayment his- portance in India
tory, credit card usage, outstanding debts, and defaults. As India continues its digital transformation, alternative
Based on this data, credit bureaus generate a score that lending has emerged as a key driver of financial inclusion,
lenders use to evaluate loan applications. A higher credit offering credit solutions beyond traditional banking systems.
score typically indicates responsible credit usage and repay- Alternative lending refers to non-traditional methods of
ment history, leading to better loan terms and lower inter- providing credit, typically facilitated by digital platforms,
est rates. Conversely, a low or non-existent score can make fintech firms, and microfinance institutions. Unlike tradi-
borrowing more difficult or expensive. However, this tional bank lending, which relies on stringent eligibility cri-
method is not always inclusive, as it primarily considers for- teria such as high credit scores, documented income, and
mal credit history and excludes millions of potential borrow- collateral, alternative lending models use technology-driven
ers who lack prior exposure to banking systems. approaches to assess creditworthiness, making loans acces-
sible to a broader population.
Limitations of Traditional Credit Scoring
In India, several forms of alternative lending have
While credit scoring has streamlined risk assessment for
lenders, it has inherent limitations, particularly when it gained prominence:
comes to financial inclusion. Digital Lending Platforms: Fintech-driven apps and
High Dependence on Formal Credit History: Tradi- websites, such as KreditBee, and Navi, offer instant per-
tional credit scores require borrowers to have an es- sonal and business loans without requiring extensive
tablished history of credit usage. Those without loans, paperwork. These platforms leverage digital footprints
credit cards, or formal banking transactions often find to approve loans within minutes.
themselves without a credit score, making it difficult Peer-to-Peer (P2P) Lending: Platforms like Faircent and
to access credit. LenDenClub connect individual borrowers with lenders,
Exclusion of New-to-Credit (NTC) Individuals and eliminating the need for traditional financial institu-

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