People who are going through a severe cash crunch generally approach commercial banks for loans. The officials of these financial institutions initially evaluate the creditworthiness of the borrowers before sanctioning any loan funds. To do so, the lenders verify the borrowers’ credit score, which they obtain from credible conventional credit-rating bureaus. These agencies determine with this figure after scrutinizing the information relating to the borrowers:
- Their financial statements and recent tax returns,
- Their previous credit and repayment history, particularly the number of defaults,
- Any current outstanding debts or mortgages they owe to other financial institutions,
- The purpose for which they seek the loan funds, and
- Their ability to clear the financial obligation within the loan period.
Only then do the bank or lending officials decide whether it is financially feasible to sanction the borrowers’ loan applications.
How does an alternative credit scoring model help banks re-evaluate their borrowers’ credit scores?
Unfortunately, there is a large segment of borrowers who are in need of loans but do not have an elaborate credit history. These individuals generally consist of students, housewives, homeowners, university graduates on the verge of establishing their start-up businesses, and retirees. As a result, they have a low or virtually non-existent credit score. Commercial banks want to caters to the needs of this category of borrowers by offering them suitable loan schemes. Therefore, these financial institutions are now seeking the help of esteemed online credit-rating agencies that are using a suitable alternative credit scoring model. This enables the lenders to re-evaluate the creditworthiness of these borrowers, minimize their own risks and expand business operations.
Alternative credit refers to utilizing information available on digital platforms to analyze the consumer behavior of borrowers with low or even zero credit scores. It involves using software applications that generate artificial intelligence and machine-learning algorithms to scrutinize big data relating to these individuals. For example, the information might be in the form of:
- Borrowers’ social media profile,
- Regularity on-time utility bill payments available on the websites of gas, water and electricity companies’ websites,
- Bank balances and deposits in the borrowers’ name,
- Prompt smart phone bill payments, mobile money, and airtime usage from telecom companies’ websites,
- Online shopping and purchasing patterns of the borrowers found on e-commerce websites, and
- Property tax records and residential buildings in the name of the borrowers on government websites.
The benefits of working with online credit-rating agencies operating alternative credit-scoring models for commercial banks are as follows:
- Improves the existing assessment mechanism the financial institutions use to determine their borrowers’ eligibility for loans
- Capitalizes on business expansion opportunities by reaching out to borrowers with weak credit profiles, and
- Boosts after-tax profits by offering better lending schemes to existing borrowers at lower costs.
An alternative credit scoring model by online credit-rating agencies is a boon for commercial banks, lenders, and borrowers. It gives people with a poor credit score access to loan funds to improve their finances. In the process, the commercial offering them the lending scheme can expand their businesses to boost profits. However, both parties should always work with credit-rating agencies with a good reputation in the market. These agencies should use analytical models which incorporate both machine-learning and artificial intelligence to generate accurate credit scores for underwriting goals.