Blockchain: How does it play a crucial role in assessing credit risk among borrowers?
By Amit Kumar Founder of GalaxyCard
Blockchain entered the scene with the introduction of digital currencies – like BitCoin and Ethereum. These currencies have played a crucial role in the growth of the FinTech industry while also driving the widespread adoption of digital transactions. The role of blockchain has transcended cryptocurrencies and continues to stay ahead in facilitating safe and secure digital transactions.
According to recent estimates, over 40 billion digital transactions worth over four billion Indian rupees have been recorded in India. To cope with the huge amounts of digital transactions, fintech companies are relying on blockchain and creating a secure digital landscape.
Before the advent of blockchain, intermediaries and third parties dominated traditional credit processes. These parties created a layer of trust and protection, but charged high fees. In addition, there were more levels of complexity and regulation in the process that limited the access of low income groups to secure credit. Given the nature of the blockchain design, the technology is unbiased and decentralized. It makes the process of transferring funds or any assets from one person to another directly. The elimination of third-party validation resulted in peer-to-peer lending that set new heights in the lending and borrowing process.
Evolution of the traditional lending process
Traditional loan models have created loopholes in the lending process due to their inability to assess credit effectively. In addition, the process was followed by a tedious task taking a lot of time in documentation and evaluation. To promote financial inclusion, new era loan companies have started leveraging blockchain technology to possess the ability and agility to use alternative data points. Mainly, digital loan platforms offer instant personal loans to employees and freelancers. Businesses follow a technology-based credit assessment approach to processing loan approvals. From on-demand eligibility verification to loan disbursement and repayment, the entire loan process is online. These platforms stimulate advanced technology to make the process more refined. This allows customers to access credit solutions directly from their smartphone to their bank account without any requirement for paperwork, physical branch visits or intermediaries.
This approach also allows the platform to serve first-time loan seekers as well as gig workers who lack regular income. By leveraging alternative loan data points outside of salary and office scores, these platforms can pay out to young professionals who are new to credit and those who are not salaried as gig workers. including part-time workers, freelancers and the self-employed.
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In addition to loan disbursements, the company’s collection practices have also become technological. The process uses robotics, automation, and many other advanced techniques in addition to calling agents, which dramatically improves customer reach and opens up a myriad of options for collections to use.
Distributed Ledger Technology for Credit Risk Modeling
The innovation of blockchain as a technology plays a vital role in reducing the challenges of the traditional lending process, primarily in verifying identities. Rather, blockchain relies on distributed ledger technology that decentralizes and secures customer data. It just works by keeping customer data in a distributed ledger instead of centralized storage, which also reduces the risk of cybercrime.
Given the blockchain infrastructure, customer profiling becomes precise, secure and private. In addition, all network participants have access to information and transaction recording without affecting customer privacy. Distributed ledger technology eliminates duplication of record maintenance, reducing costs and time involved in the process. In addition, the blockchain is based on immutability, which means that no participant can alter the transaction recorded in the distributed ledger. However, if an error occurs while keeping the record, it should be added to the reversibility of errors which remains visible.
The arrival of blockchain guarantees confidence, security and efficiency in the lending and borrowing process. Transparency, accuracy and timely recording of financial data improves the assessment of credit risk.