The Role of Credit Scoring and Alternative Lending in India's Financial Inclusion

Financial inclusion extends beyond mere access to bank accounts, it encompasses a broader goal of ensuring that financial benefits effectively reach the under banked population. Recognizing this need, the Reserve Bank of India (RBI) introduced the Financial Inclusion (FI) Index as a comprehensive tool to assess the depth and reach of financial inclusion across the country.

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Harsh M Sankhala Chief Manager, Research, SBIIT, Hyderabad

Introduction

Financial inclusion has emerged as a critical driver of economic growth and social development in India, particularly those traditionally excluded from the formal banking system. With a significant portion of the population still lacking access to credit, savings, insurance, and digital payment systems, financial inclusion is essential for empowering low-income households, small businesses, and rural communities. It fosters economic participation, reduces poverty, and enhances overall financial resilience.

Despite notable progress through government initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY), Pradhan Mantri Mudra Yogna (PMMY) and digital banking reforms, millions of Indians-especially those in rural areas, informal employment, and micro-enterprises-remain unbanked or under banked. The biggest hurdle they face is limited access to formal credit, as traditional lending institutions rely on stringent eligibility criteria, including credit history, income proof, and collateral.

Credit scoring by alternative lending models have emerged as game-changer in bridging this gap. By leveraging digital footprints, transaction data, and artificial intelligence-driven risk assessments, alternative credit assessment methods provide a more inclusive and dynamic approach to evaluating creditworthiness.

Defining Financial Inclusion

Financial inclusion extends beyond mere access to bank accounts, it encompasses a broader goal of ensuring that financial benefits effectively reach the under banked population. Recognizing this need, the Reserve Bank of India (RBI) introduced the Financial Inclusion (FI) Index as a comprehensive tool to assess the depth and reach of financial inclusion across the country.