This Zero Discrimination Day, Let’s Expand Equality To Credit Access

Every 1st March, the world celebrates “the right of everyone to live a full and productive life”, in the form of Zero Discrimination Day. While we’ve made significant progress on this front with each passing year, perhaps we should pay attention to an aspect closer to our hearts as a brand – credit access. Financial discrimination is a reality, after all. Fortunately, with sensitivity at the forefront in this age, there is considerable awareness being spread to combat it. This is now leading to better opportunities in the financial sector, including loans.

The loan market in India is rising. Take the period February 2017 to exactly a year later, when there has been a sharp increase in the number and assets under personal loans, recording a growth of 20.4%. The number of personal loans and credit card debt recorded for around the same period was almost double the amount of FDI in the country. If we go even further back, for the period of 2014-2018, the compounded annual growth rate of the same has increased four times. 

But this doesn’t always convert to good overall growth. Despite the rise in the amount of credit doled out, there remains a disparity between the total number of applicants and those that are approved for loans. The rift goes deeper than portrayed. Borrowers are not rejected just out of necessity to protect the banking system, and not every rejected application is at a considerable risk of not repaying the loan. Sometimes there is the simple issue of discrimination at the root of this.

What Discrimination Do Borrowers Of India Face?

Studies show that there could be a number of modes of bias. It could be on the basis of prejudice, inaccurate stereotypes, and incentivization. For example:

• Banks have been known to have a low acceptance rate based on the location of the borrower.
• In other cases, banks may often reject cases based on the nature of the business a borrower may be running.
• In some rather unfortunate cases, human bias – such as an agent’s perception of a borrower – from mannerisms to even names, could be the cause of a loan application to be rejected.

Banks, at the end of the day, are capitalist organizations. This means that the decisions they take are based on the impact they’d have on the bank’s bottom line. If a bank has seen historical trends indicating higher loan defaults than average from a particular area or for loans to a certain business, higher rejection rates simply become a matter of policy over time. And when there’s human involvement involved, discriminating on a borrower’s characteristics may not be, strictly speaking, legal. But the human bias may manifest itself in other ways – leading to a more thorough underwriting procedure than normal, with a higher probability of locating red flags as compared to other borrowers – ultimately becoming grounds for rejection.

As a borrower, if you have any grievance related to discrimination, you will probably have to go the legal route. It is a lengthy and tiring process, and for many, this is not an option. They prefer to whine about it and get on with their lives.

Banks are heavily regulated by the RBI and government when it comes to lending. However, a bank, in theory, is a business and it is up to them to accept a loan application or not. While the regulations in place work to prevent misuse of power and ensure the sustainability of banks to some extent, whether they create a free and fair mechanism for the public to gain loans is a matter for discussion. To clarify, there are no fundamental flaws in the lending system in India, but there are issues. Personal bias or discrimination on the basis of status or profession plays a part in deciding whether your loan will be approved, is, unfortunately, a reality.

Take home loans, for example. If a lender is not convinced by you or does not like your predicament for any reason, you are likely to get rejected. The reason for this, again, is the regulations in place and the need to recover debts. This is dependent on the business model of a bank, which requires constant cash flows, mainly so that it can honor withdrawals. Not being able to do so reflects very badly on the bank. This is often a reason, and sometimes even an excuse, to reject applications. And nothing can be done about it because it is their legal right to do so.

Having said that, sanctioning loans is the primary source of income for banks. They would not intentionally try to get your loan rejected. But unexpected policy-related and unconscious discrimination can often play a part in this process. 

How Fintech Platforms Are Coming To The Rescue

To that end, fintech portals like EarlySalary are superior alternatives, as they don’t subject themselves to restrictions as stringent as those for the banks. They are conceived out of the shortfalls of the current lending system and work to fix holes in it (and of course, succeed as a business).

Talking about lending platforms, every lender might have a different working mechanism:

• They are free to create whichever lending structure they want however they see fit, provided the intention is not to defraud others. 
• This gives them a competitive advantage as they can use advanced techniques to create a more efficient system to compute a potential customer’s ability to repay before creating the mode of repayment. 

For some lenders, this is a rigid system with set steps. For others, it is flexible. What is understandable here is that they provide many advantages as compared to banks. 

• For one, there is a lack of complex paperwork and wastage of time. 
• Since most underwriting and approval processes are information and computer-based, there is little scope for bias. In fact, there is very little contact between you and the agent, as most of the requirements are taken care of when opening an account with the lender, which again is usually quite simple. 
• The focus of lenders is to make the process simple, and they handle everything else for you. 
• A few things don’t change – should you provide false data, your application will be rejected. The verification process is strict in nature because they don’t want to be scammed.

Things are not looking too bad in the fintech sector, with the inaugural Fintech Adoption Rate in India in 2017 found to be 52%, compared with the global average of 33%. It then grew to an amazing 87% in 2019. This is fairly healthy for an industry that has truly taken off in the last three years. The market size a year prior to that was estimated to be around $8 billion and a growth of 1.7x is predicted by 2020. This is not all – the Compounded Annual Growth Rate over five yours is estimated to be 22%. A major contribution to this is the rise of digital payments and mobile wallets in recent years. This is set to be a contributing factor in raising awareness over digital transactions which could possibly lead to further growth in the fintech sector.

With the demand of loans increasing due to awareness over the falling value of money, there is an ever-increasing need to ensure that the lending system is not biased.

A large number of players in the market are working towards this, having a goal of a discrimination-free lending system. With every small step, they reach closer.