In recent years, financial inclusion has become a national priority in India. With millions of individuals still outside the formal banking system due to a lack of traditional credit history, lenders are now turning toward alternative credit scoring models. These models aim to widen access to financial services by assessing creditworthiness through non-traditional data points.
This shift is not just a technological upgrade—it's a social and economic revolution. It enables lenders to reach underserved populations and empowers individuals and small businesses with limited or no formal credit history. In this blog post, we will explore how alternative credit scoring is reshaping lending in India and why the Best Microfinance Banking Software is key to implementing this new strategy.
What Is Alternative Credit Scoring?
Alternative credit scoring refers to the use of non-traditional data sources to evaluate a borrower’s creditworthiness. Instead of relying solely on credit bureau data (like repayment history, existing loans, or credit card usage), alternative scoring models assess:
Mobile phone usage and payment patterns
Utility bill payments
Rental history
E-commerce transactions
Social media behavior
Employment and income history from bank statements
Psychometric data and behavioral trends
This method is especially beneficial in India, where a large segment of the population remains underbanked or completely unbanked. For example, a farmer or a street vendor may have never taken a formal loan, but might still be financially responsible based on mobile recharges, consistent utility bill payments, and steady income through informal channels.
Also read: Empowering Financial Inclusion Through Digital Microfinance Platforms
Why India Needs Alternative Credit Scoring
According to a report by TransUnion CIBIL, only around 22% of India’s adult population has access to formal credit. This leaves a staggering majority without any recognized credit score. The traditional system, which depends heavily on historical borrowing behavior, fails to capture millions of financially active individuals.
Some of the primary reasons India urgently needs alternative scoring include:
Large Informal Economy: Many self-employed individuals or gig workers do not have documented incomes, yet they are financially stable.
Limited Credit Penetration: Rural and semi-urban regions are still largely excluded due to lack of physical infrastructure and credit history.
Youth and New-to-Credit Population: A large chunk of India’s population is under 35, many of whom are first-time borrowers.
Women and Marginalized Groups: Alternative scoring helps empower women and others who might have been excluded due to socio-economic biases.
By implementing alternative scoring models, lenders can make better, fairer lending decisions and simultaneously support the government's goals of economic inclusion.
Key Data Sources in Alternative Credit Scoring
Lenders and microfinance institutions that implement alternative scoring models use a variety of data points, such as:
1. Telecom Data
Call records, recharge patterns, and bill payment consistency can be used to indicate responsibility and regular income.
2. Mobile Wallet Usage
Transactions via Paytm, Google Pay, or PhonePe provide insights into spending and saving behaviors.
3. Banking Transaction Data
Even if a borrower has no loans, consistent salary credits and debit transactions in their savings account signal financial health.
4. Utility Bills
Timely payment of electricity, gas, and water bills reflects financial discipline.
5. Rental Payments
A history of regular rent payments is a reliable indicator of stable financial behavior.
6. E-commerce Activity
Purchase history, return frequency, and digital behavior on platforms like Amazon or Flipkart also provide valuable scoring metrics.
Benefits of Alternative Credit Scoring for Lenders
Alternative credit scoring offers several benefits to financial institutions and NBFCs (Non-Banking Financial Companies):
Increased Market Reach: Access to previously unbanked customers
Reduced Default Risk: Better identification of responsible but unrecognized borrowers
Cost-Efficient Lending: Fewer rejections, better approvals
More Dynamic Credit Models: Frequent updates based on ongoing data, unlike static credit scores
Promotes Financial Inclusion: Helps in achieving regulatory and CSR goals
By combining these advantages with robust analytics and automation, lenders can revolutionize their credit risk strategies.
Also, check our article: The Role of Microfinance Software in Financial Digitalization
The Role of Technology: Best Microfinance Banking Software
To implement alternative credit scoring successfully, technology is the backbone. This is where Best Microfinance Banking Software plays a crucial role. Modern microfinance software solutions can integrate various data sources, apply intelligent algorithms, and offer real-time decision-making tools.
Must-Have Features in a Microfinance Software for Alternative Scoring:
Data Integration Tools to fetch telecom, utility, and mobile wallet data
AI & Machine Learning Engines to process behavioral and transactional data
Custom Scoring Models adaptable to local and regional borrower profiles
Credit Decision Dashboards for real-time approvals and rejections
Compliance and Audit Tools to meet RBI and government regulations
Mobile-first Accessibility for field officers and remote borrowers
By implementing such features, financial institutions can automate much of their underwriting process while minimizing biases and human error.
Suggested Read: Steps to Transition from Manual to Digital Loan Management
Challenges in Adoption
Despite its potential, alternative credit scoring is not without its challenges:
1. Data Privacy Concerns
Borrowers must consent to sharing personal data. Institutions need transparent privacy policies and robust cybersecurity measures.
2. Model Accuracy
Scoring models need local calibration. What indicates good behavior in one region might not apply to another.
3. Regulatory Compliance
India's regulatory environment is evolving, and firms must keep pace with laws around data usage, credit decisions, and consent.
4. Technology Readiness
Many smaller MFIs may lack the tech infrastructure to implement alternative scoring models without the right software solution.
Real-World Impact: Case Studies
Urban Self-Employed Entrepreneurs
In Delhi, a digital lender piloted a lending program using alternative scoring based on utility bills and mobile wallet usage. Loan approvals among self-employed individuals without credit history rose by 38%, with a default rate below 4%.
Rural Women’s Group in Odisha
An NGO integrated behavioral scoring into its lending model using data from cooperative bank accounts and mobile recharges. Within one year, over 2,000 women accessed formal credit for the first time, improving household income and stability.
The Future of Alternative Credit Scoring in India
The future of credit scoring in India is hybrid—where traditional credit scores are augmented with alternative data models to create a fuller, fairer picture of creditworthiness. Technologies like blockchain, AI, and open banking will further streamline this process.
As the economy becomes increasingly digital, and as the financial needs of India’s next billion evolve, alternative credit scoring will be not just a convenience but a necessity.
Why Choose Gtech Web Solutions PVT. LTD.
If you’re a lender, NBFC, or microfinance institution looking to implement alternative scoring, you need the Best Microfinance Banking Software that’s built for India’s unique challenges.
Gtech Web Solutions PVT. LTD. offers industry-leading microfinance software equipped with advanced scoring tools, AI-based underwriting, and integrations with digital data providers. Their solutions empower lenders to make smarter, faster, and more inclusive credit decisions.
With a strong reputation and proven expertise, Gtech ensures that your organization stays ahead in the digital lending game—while supporting the greater mission of financial inclusion.
Partner with Gtech Web Solutions and take the smarter route to inclusive lending.
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