Why do we need credit? We avail credit to address our unmet needs such as buying an electronic appliance or a house, or to fund our children’s education, buy livestock, or start a business – the needs are varied.
The reason? Quiet simply to make life better for ourselves and those dear to us. Still, billions of people remain out of the credit ecosystem due to socioeconomic inequalities and insufficient creditworthiness.
Indian banks and financial institutions typically require borrowers to demonstrate:
1. Established credit history showing loan repayment capability
3. Strong financial background with documented income
4. High purchasing power and asset ownership
Unfortunately, vulnerable groups such as migrant labourers, workers from the unorganized sector, domestic workers, blue-collar workers, etc. cannot comply with these guidelines. This is because they don’t possess the necessary resources such as a strong financial background and/or demonstrate a high purchasing power to prove their creditworthiness. Yet they are also the ones who need credit the most.
With no access to institutional credit they “…turn to informal channels despite high interest rates and risk of exploitation by unregulated players (Development Asia, 2020).”
Alternative Credit Scoring: A Fintech Solution for Financial Inclusion in India
Alternative credit scoring, a fintech invention, can address this paradox by providing a reliable assessment of creditworthiness of the most vulnerable persons to regulated lenders.
The Personal Data Protection Bill concerning access to alternative credit data is currently in Parliament for passage.
How Alternative Credit Scoring Works in India
According to Development Asia, 2020, “Alternative credit scoring refers to the use of data from digital platforms and applications on consumer behavior for credit risk assessment” by NBFCs (Non-banking financial companies). Alternative scoring provides information from multiple sources to ascertain a person’s creditworthiness instead of relying solely on data from credit bureaus that is used by lenders to assess credit risk.
With the help of AI and ML-powered algorithms,fintechs derive alternative credit scores from payment history of utility bills e.g. electricity and gas; customer’s work history through social media platforms, psychometric data through customer surveys, smartphone analytics e.g. no. of calls made, SMSes sent mobile bill payments, digital (UPI) transactions, etc.
All these points of information are used by fintechs to approve loan applications for customers.
Real-World Application: Decimal Technologies
Decimal Technologies, a fintech company, has solutions for MSMEs. Decimal looks for Past Financial Statements as well as Income Tax returns to assess a potential client’s credit risk profile. In order to augment their assessment, Decimal uses cash flow data and other business metrics which serve as surrogate or alternatives to formal data sources.
Digital transactions in the last decade have simplified the process of gathering alternative credit data that is reliable and well-documented. Thus we can see alternative credit scoring drive financial inclusion of the most vulnerable into the credit ecosystem.
India’s digital payments revolution—with over 100 billion UPI transactions in 2024—provides robust, documented alternative data that makes credit scoring more accurate and inclusive.
5 Benefits of Alternative Credit Scoring for India’s Economy
1. Inclusivity in credit access: Alternative credit scoring allows a vast number of people to enter the credit ecosystem especially those from the bottom of the pyramid, which is good for both lenders and borrowers in terms of business. It presents possibilities and opportunities for both parties.
2. Growth and development: More people get access to credit to enhance their standard of living. This is also a positive development for the country’s micro and macroeconomic growth, human development, etc.
3. New customer base: both traditional lending institutions and non-traditional can access a larger and newer customer base that is in need of credit. Banks and NBFCs thus have a large and diverse pool of customers to take their products to.
4. Accelerated underwriting process: alternative credit information can speed up the lending process when compared to mainstream credit reports. This is because the latter consists of dated or historical information from formal sources only, which might be inadequate for users who haven’t been exposed to formal banking sectors, and its overall assessment is a tedious process. Alternative credit scores aid quick decision making.
5. Faster digitization: The COVID-19 pandemic has provided the impetus for the financial system in India forcing banks to either go digital or go under. It is also a catalyst for fintechs pushing them to accelerate and upgrade at the speed of light to sustain the demand for digitization caused by the pandemic.
The push for alternative credit scoring “will not only help banks improve business agility and market responsiveness, but also enable them to capture new market segments and deliver personalized customer experiences” (Tata Consultancy Services, n.d.).
The Future of Alternative Credit Scoring in India
As India’s fintech sector continues growing (projected to reach $150 billion by 2025), alternative credit scoring will play a transformative role in reshaping the country’s socioeconomic landscape.
With more power comes more responsibility – this couldn’t be more true in the case of Fintechs. As Fintech in India makes strides, it will continue to play a vital role in transforming India’s social landscape. Fintech tools like alternative credit scores have the potential to close the inequality gap by making access to credit a reality for all.
It can pull millions out of poverty and enable a life of, as Indian Prime Minister Narendra Modi puts it, “identity, dignity and opportunities” (YourStory.com, 2018).
People Also Ask
Q1: What is alternative credit scoring and how does it work in India?
Alternative credit scoring evaluates creditworthiness using non-traditional data like UPI transactions, utility bill payments, mobile recharge patterns, GST returns, and smartphone usage. AI algorithms analyze this digital footprint to generate credit scores for individuals without formal credit history, enabling NBFCs and digital lenders to serve India’s 190 million underbanked population.
Q2: Who benefits from alternative credit scoring in India?
India’s financially excluded populations benefit most—migrant workers, daily wage laborers, domestic workers, blue-collar employees, small farmers, gig workers, and MSMEs without extensive documentation. Lenders also benefit by accessing a ₹5+ trillion untapped market while maintaining responsible, data-driven risk assessment practices.
Q3: Is alternative credit scoring legal and regulated in India?
Yes, it operates within India’s regulatory framework. The RBI oversees lending practices, while the Personal Data Protection Bill (under parliamentary review) will govern alternative credit data usage. Fintech companies and NBFCs must comply with RBI digital lending guidelines, data privacy norms, and fair lending practices.
Q4: What data sources do Indian fintechs use for alternative credit scoring?
Indian fintechs analyze financial data (UPI transactions, digital wallets, utility payments), government records (GST returns, ITR, Aadhaar-linked data), behavioral data (smartphone analytics, social media profiles, psychometric surveys), and business metrics (cash flows, e-commerce sales, vendor payments). This creates a comprehensive creditworthiness profile beyond traditional CIBIL scores.
Q5: How accurate is alternative credit scoring compared to traditional credit scores?
Alternative credit scoring is equally or more accurate for borrowers with limited credit history. Real-time digital payment behavior provides current financial health indicators, while traditional scores rely on 30-90 day old data. For India’s new-to-credit population, alternative scoring shows 75-85% default prediction accuracy, comparable to traditional scoring.
Q6: Can alternative credit scores help me get a loan if I have no credit history?
Yes. Alternative credit scoring addresses the “thin file” problem for Indians without traditional credit history. If you regularly pay utility bills, maintain consistent UPI transactions, or demonstrate reliable digital payment behavior, fintech lenders can assess your creditworthiness. Loan amounts may start at ₹10,000-₹50,000, helping you build formal credit history.
Q7: What are the risks or disadvantages of alternative credit scoring?
Key concerns include data privacy issues, algorithmic bias leading to discrimination, digital divide excluding rural/elderly populations, data accuracy errors from third-party sources, and over-indebtedness risks without financial literacy. Responsible fintechs address these through transparent algorithms, robust data protection, financial counseling, and RBI-compliant practices.
