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Overcoming Credit Constraints for the Aspiring Middle Class

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By Ajay Chaurasia, Vice President: Marketing, Product & Business, RupeeRedee

India is the second most populous country with a large chunk of over 31% constituting its middle-class population. The size of this segment is projected to nearly double to 61% by 2047 as the country witnesses stability in its political and economic reforms. However, when it comes to access to formal credit, it is considered the most underserved large economy with ~56% credit-to-GDP against ~88% of advanced economies and a whopping ~135% for emerging markets.

People earning less than Rs. 5 Lac annually fall under the category of an average middle-class Indian and yet are recognized as the most underserved. This segment faces challenges that inhibit loan processing due to stringent credit scores, complex income requirements, extensive documentation, and paperwork. Consequently, it makes the timely availability of credit outside the reach of many middle-class borrowers.

On the harder side, this scenario presented the unwillingness of old-school banking and financial institutions in lending money to low-income groups or people with low credit scores. This created a huge gap in accessibility, unfulfilling the demand of many millennials.

Enabling financial inclusion for the middle class
There is an extensive need in relaxing the credit constraints for the middle-class segment that microfinance has not succeeded with. Against this backdrop, a new form of credit products has emerged with much effectiveness. Further, the emergence of digital lending has simplified lending processes, specifically for those who need small ticket-sized loans with less hassle.

Users simply have to download an authentic digital lending app on their smartphone and provide important particulars instead of running to brick-and-mortar banks. The tech integration in digital lending processes has further made it easier to assess credit history, document verification and repayments for the provider as well as borrowers. As a result, new loan demands are emerging in the sector bridging the financial inclusivity gap.

Building credit history
Before the emergence of digital lending, many borrowers struggled with facing rejection in the first stage itself. Their applications were rejected on the criteria of income, age, bank documents or anything that did not satisfy the lender’s requirements. Another obsession that traditional banks and institutions have is with credit scores. Anyone with a poor or no credit history usually had to have a hard time getting their loan applications processed.

There is a myriad of first-time loan borrowers or Gen Z population that has recently started earning and find it difficult to avail a loan due to no credit history. That’s where digital lending apps intervene and relieve their pain. By availing a digital loan, these borrowers can build a decent credit history which further makes them eligible for high ticket-size loans.

Quick processing, instant disbursal
There was a time when a middle-class Indian used to plan ahead of time in order to buy something on credit. Whether buying an electronic household product or financing the education of their children, it took days for a middle-class Indian in filing loan papers and get the disbursement. Digital lending apps are overcoming such barriers for this segment by taking only a few minutes in submitting an application, uploading documents and getting the funds transferred.

Because the entire process is digital, it has reduced buffer time between submitting a loan application and disbursal. The basic setup takes a few minutes and customers can choose from a range of products including medical emergency loans, weddings, education, etc.

Customized loan products
The constantly rising costs of living and slow growth in income generation hinder the middle class to have access to financial products, as per their requirements. The stringent eligibility criteria and high approval/interest rates hamper the accessibility of such products.
New-age fintech and digital lending players have realized the need to open vistas for other financial products. Middle-class customers who today are struggling for small ticket loans are also underserved for other financial products – SIPs, Mutual Funds, etc. By understanding their credit history, and behaviour, digital lending apps design tailor-made products to meet the customers’ demands.

Final Thoughts
The present Indian fintech companies have also focused on developing ingenious products for underserved customers. As we navigate the digital landscape, digital lending has come as a respite for middle-class customers. More players are entering the market and even following regulations to serve the customers with ethical products, procedures and customization.

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