The Role of Open Banking in Personal Loan Approvals

Imagine a shopkeeper named Raj who runs a small grocery store in a small Indian town. He wants to take a personal loan to expand his shop but is worried because he doesn’t have a detailed credit history. 

Traditionally, lenders might hesitate to approve his loan. But thanks to open banking, Raj’s financial journey takes a positive turn. His regular bank transactions, utility bill payments, and steady income are now accessible to lenders securely and transparently. This helps the bank assess his creditworthiness better.

What is Open Banking?

Open banking is a fintech system that allows one to securely share the financial information of any individual with third-party financial institutions, as APIs do between banks. This brings lenders to a real-time, relevant understanding of a borrower’s finances.

How Open Banking Simplifies Loan Approvals

1. Better Access to Financial Data

Traditional lenders rely on documents like salary slips or tax returns. These can sometimes be outdated or incomplete. Open banking allows lenders to view real-time data directly from your bank account. 

For example, suppose Anita applies for a ₹5 lakh personal loan. Instead of waiting for her to gather multiple documents, the lender can access her transaction details instantly through open banking. This reduces approval time from weeks to just hours.

2. Personalised Loan Offers

With open banking, banks and financial institutions can customise loan products based on your financial habits.

For instance, Raj, our shopkeeper, pays his electricity bill of ₹ 2,000 regularly and saves ₹ 10,000 every month. Using this data, the lender might offer Raj a loan with flexible EMIs suited to his cash flow instead of a fixed repayment plan.

Why Open Banking Matters for India

In India, many people still lack a credit score, but they regularly make payments for rent, mobile recharges, or groceries. Open banking considers these non-traditional data points, giving people like Raj or Anita better chances of loan approval.

For example, according to a report, most Indians have a bank account, but not all of them have a credit history. Open banking can bridge this gap by evaluating alternate data like utility payments or small business transactions.

Key Advantages of Open Banking

Here’s how loan approval times compare with and without open banking:

Loan Approval Times (in Days)

This shift makes the process faster and smoother for both lenders and borrowers.

How Open Banking Encourages Financial Inclusion

1. Loans for everyone

Open banking would help to cater for even informal credit histories such as those of the daily wage earner or a small business owner.

For example, Meena, who earns ₹15,000 a month as a tailor, doesn’t have a credit score. But her consistent account deposits and bill payments of ₹5,000 prove her financial stability. Using this data, a bank can confidently offer her a ₹1 lakh loan to buy a new sewing machine.

2. Affordable Loan Terms

With more accurate data, lenders can offer competitive interest rates and better repayment terms, benefiting borrowers.

Conclusion

Open Banking is a great revolution for all, like Raj, Anita, and Meena. It’s a complete change in personal lending speed and access, making it simpler and more inclusive for everyone. Open banking will help lenders arrive at better decisions while ensuring borrowers enjoy this process all the more. 

There would be newly created opportunities for a person who would otherwise be an inconsequential citizen in the country-an American or small business owner, or someone who has no credit history. It’s a win-win for every party concerned.