Banks should leverage on data collected by financial technology (fintech) firms doing mobile lending to build a more robust credit scoring system that can cut the level of bad loans in the sector.
Investment bank Exotix Capital says the data currently provided by credit reference bureaus is only providing background checks on borrowers, and not offering credit scores which are more useful in identifying bad borrowers.
The lenders themselves have not built internal capacity to build a credit score system for clients, hence the need for collaboration with fintechs who are better placed to capture borrowing trends through their systems.
“Fintechs are at present collecting huge amounts of data from clients through their phones. With this, they can create pseudo credit scores to enable lending on their platforms, which partly explains their low default rates (NPLs average of one to two percent),” said Exotix in a note.
“Most fintechs agree that it would be useful to create a shared credit scoring system with the banks at the industry level. Whereas mobile lending is showing strong growth, we think better data mining and information sharing will help to advance and protect the sector.”
Latest Central Bank data shows that the level of non-performing loans in the banking sector stood at 12.4 per cent in April, up from 11.4 per cent at the end of February.
Lowering the NPL’s is one of the objectives of having a robust credit scoring system, which would also help lower the cost of credit by reducing the risk exposure that the lenders have to factor in before disbursing loans.
The lack of regulation of the fintech lenders, however, means that some do not observe prudential lending practices, which can result in over-borrowing. Banks on the other hand operate under tighter regulation.