Credit scores vs social scores: Can lenders use farmers’ social capital to provide agricultural financing?

Aparna Chandrashekar   /    Content Specialist    /    2022-05-02


For the most part, fintechs will argue that data-driven agricultural financing is a gift that will keep giving. We’re on the same page - we think innovation in farming technology will ultimately serve as easy-access data points for new and complex economic models for fintechs. We’ve already written about how financial institutions and fintechs can leverage technology and ink  partnerships to lend better to the agricultural sector. 

But if we were to consider what agriculture looks like today, “data-driven agriculture” might seem like a pipe dream. 

Among the bigger challenges for agri-lenders,  Unreliable data in the sector, Low levels of digital literacy among farmers, and plenty of landless farmers that are excluded from the digitisation, are glaring. 

For technological innovation to work, access to digital literacy, training and even emotional support from peers is essential. 

These peers form the least tangible part of capital requirements - social capital

What is social capital in the agricultural context? 

Intuitively, social capital can be defined by the idea that people around you are an important asset, that can be “called upon in a crisis, enjoyed for its own sake, and/or leverages for material gain

In farming, social capital can be formed via Farmer Producer Organizations (FPOs), Agricultural cooperative societies, and government-sanctioned data stewards. 

An FPO, for instance, is simply a collective of farmers, and this collectivization allows them to, among other things:

  • Improve their bargaining power to access financial and non-financial inputs,services, and technologies

  • Reduce transaction costs

  • Tap high value markets 

  • Enter into equitable partnerships

Coming together in an FPO is especially beneficial to smaller farmers who can retain their land rights and improve production and procurement.

Farmer cooperatives do much the same.  Essentially, these networks do what most other networks do - create social relations that enable individuals to achieve goals that may not otherwise be able to achieve by themselves. 

For agri-lenders, the social capital generated as a result of these networks could potentially serve as an alternate credit scoring mechanism. 

How can fintechs leverage this social capital to lend better?

Formal/informal sources have historically been nervous to lend to small/marginal farmers - 

FPOs and farmer cooperatives largely work with small/marginal farmers and could be pivotal in providing insight into their behavior. 

What would a  credit scoring mechanism based on social capital look like?

Think about all the fintech innovations that exist today thanks to the industry’s AI/ML capabilities that predict behavior. Everything from personalized and adaptive finance, encrypted cryptocurrency trading, customer identity verification and fraud prevention to inclusive finance, smart audit, and handshake loan brokerage. Fintech was built on the conjecture that predicting human behavior trumps building core technology.

Social capital, which gauges trust and behavior, (two of the hardest metrics to pin in a traditional credit scoring model), could possibly make formal lenders more confident to lend. 

We’ve tried to compile a list of variables that could feed into a social score -

  • Borrowing behavior: The total amount of money borrowed by the family and how much old debt they still have. 

  • Social expenditure: One of the problems with loan recovery in agriculture is diversion of loans. A lot of loans borrowed for agricultural purposes are eventually diverted towards funding social ceremonies. Weddings and festival spending are an important means of social contact and maintaining relationships. So it would only make sense to measure how much income/credit is spent on social ceremonies 

  • Family composition and data: Number of members in the family and their education levels, employment status etc.

  • Peer vouching: A Net Promoter Score (NPS) for farmers of sorts. How likely are your peers going to recommend you for your trustworthiness? 

  • Merchant Approval: Most farmers have an informal credit system in place with local traders etc.- their guarantees can prove crucial to understanding the potential repayment behavior 

Of course, social capital also entails plenty of rewards for the farming community. But money is the lever that moves the world; For lenders looking to lend to one of the largest borrower classes in the country, social capital can be the lever that moves the farming community into the formal lending system. 

And fintechs are evolving capabilities to develop complex economic models that take into account all the variables that could contribute to a social score. At FinBox, for instance, our mission is to plug the financial inclusion gap for last-mile citizens with technology that turns every brand into a bank. Without having to write a single line of code. 

We’ve painstakingly weeded out biases in traditional lending with our machine learning models trained on billions of data points. Our credit scoring capabilities are based on more than 5,000 behavioral and financial parameters, with 16 million personas - making it the largest new-to-credit (NTC) customer base in India. 

With all the innovation and FinTech’s rally behind the cause of financial inclusion, it’s time that credit reaches where it’s due.