Alternative Credit Scoring – A Double Edged Sword
Leveraging alternative data for credit scoring - understanding opportunities and risks
Context
Access to finance is a major challenge impeding small businesses and
entrepreneurs. It is perceived that the traditional credit scoring framework fails to adequately capture ‘thin file’ borrowers who may have little or no credit history. However, technological innovation has enabled the use of big data to assess the creditworthiness of ‘thin file’ customers who lack detailed credit history on the basis of non-traditional data sets such as telecom data, social media data, buyers’ patterns on e-commerce websites, etc. This has led to the emergence of lending models that rely on such alternative credit scoring mechanisms. However, the use of big data for algorithmic scoring also poses certain challenges which include concerns regarding discriminatory practices, data privacy, transparency, etc. With several studies recommending the use of digital lending coupled with alternative credit scoring for the MSME sector, these issues assume immense significance.
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About the Authors
Shehnaz is Senior Resident Fellow and Lead, Fintech and ALTR. She works on emerging areas of policy and law on the intersection of finance, technology, and inclusion. At Vidhi, she has worked with several Ministries of the Government of India on matters relating to digital payments, financial regulation, commercial laws and business and human rights. Her independent research at Vidhi focuses on leveraging technological solutions to build a robust and inclusive financial system for all in India. Prior to joining Vidhi, she worked as an associate at the Financial Regulatory Practice at Cyril Amarchand Mangaldas, Mumbai where her work focused on advising leading financial institutions (both Indian and multinational), including payment systems on legal and regulatory issues in India. She has also involved in several mergers and acquisitions in the financial space. She has also worked as an associate at the Dispute Resolution team at JSA, New Delhi. She writes frequently for the Oxford Business Law Blog and media outlets such as Hindu BusinessLine,Financial Express, MoneyControl, FirstPost, etc. She graduated from RML National Law University in 2011.
