It was not long ago, in India, credit was monopolized by the banking sector. The banking sector has always been slow in addressing the credit needs of the country. Both the retail and MSME sector have been credit starved segments till now. This has resulted in lack of growth in MSME sector across the country. Even today, the credit gap in MSME sector alone is roughly Rs. 26 trillion.

Though technology was infused in the form of core banking solutions in banks over a decade ago, innovation of new products and services have not happened. Even today, large financial institutions in India offer the same products which have been offered a decade ago to their customers.

Changing Needs

Today, customers require more tailored financial products and services. Many customers keep getting random SMS messages offering loans, when they are not eligible for the same. This has resulted in waste of efforts from both the sides – supply (financial institutions) and demand (customers). It has become critical for financial institutions to map their offerings across the customer life cycle. The needs of the customer as they progress through life changes. Today, almost all the customers have gone through e-KYC thereby providing valuable information to these financial institutions. Customer segmentation is critical for innovation of new products and services.

Millennials would like to get their services on their mobile phone. The speed of service is critical to this generation of customers. They appreciate the knowledge of the service providers and are willing to try new products and services.

As shown in the diagram here, the need for finance in a typical life cycle of the customer can be mapped for each demography of customers. For example, customers in 18-25 age group require two-wheeler finance and education loans. Hence, products can be tailored to meet the specific requirements of this group of customers. Today, banks can easily segment their customer base and target suitable products to each segment.

Similarly, in MSME sector, each sector has its own unique financial requirements. Now, the data related to GST returns are available for the financial institutions, it is easier for them to tailor the product to each sector based on their cash flows. The ability to assess credit risk has become far easier with the adoption of technology such as AI (Artificial Intelligence) and ML (Machine Learning).

Intelligent Use of Data

Government of India has pushed digitization through Digilocker, GST portal and IT portals. Financial institutions have access to digital data about the prospective/existing customers.

Combining internal silos of data with external data provides a powerful platform for banks to assess the credit risk of the applicant. As shown here, the amalgamation of all data sources will yield a comprehensive view of the customer, thereby easing the process of risk assessment. Various AI based algorithms can be used to develop smart models to predict NPA, fixing interest rates, retaining good customers and attracting new millennial customers.

This will also help bring the consistency in risk assessments and credit approval across the organization. The digital trove of data should be put to good use in helping the underserved customer base in the country.

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Path Ahead

Niti Aayog is recommending full stack digital banks to be allowed to operate in the country. This might help increase the penetration of financial services in the country. There are several new fintech firms, who have already used the India Stack to provide complete digital experience for customers.

India, will finally see new financial products being promoted by these fintech firms to address the large credit gap in consumer and MSME sectors of the country. Personalized financial services will become the norm for the coming decade. To meet the aspirations of young millennials in India, these products/services will be offered on a mobile app. The products will be mapped to the customer’s journey in their life and will get increased acceptance from the market.

Tailored financial products can be innovated using the emerging technologies combined with the government digital platforms. Financial institutions, who invest in these will emerge as winners in the coming years.

About Author

Guru Murthy is the CEO of Processware Systems a leading supplier of technology solutions to financial sector. Guru obtained his Masters in Computer Science and Engineering from University of Missouri in the US.

Guru has more than 30 years of experience in the financial sector and has been an invited speaker at many of the events. He was a guest faculty at IIM-Bangalore.

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