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Digital Lending in India: Stepping Up in a Full-fledged Way

Digital Lending in India: Stepping Up in a Full-fledged Way

The Indian Lending landscape has undergone some dramatic shift over the past few years. Digital Lending in India is a new trend and is accelerating at full speed. The legacy systems and practices prominent in this space are disappearing and getting replaced with digital processes powered by the latest technology and Artificial Intelligence. As a consumer market, India is relatively complicated in geography, cultural preferences, and consumer behavior. There are multiple consumer segments for any given product or service, each with its own unique set of buying choices. But a common unifying factor is the ubiquity of mobile connectivity and the rapid adoption of the internet as a data source influencing finance-related decisions.

The primary mode of accessing potential borrowers in need of credit, credit underwriting, and entering into loan agreements is offline through brick and mortar outlets supported by call centres. Banks and NBFCs rely heavily on hardcopy documents, on traditional data sources like income statements and credit scores, face-to-face meetings, and wet signatures. The same makes technology just another support system for the brick and mortar world of carrying business. The full leveraging of technology and actual digitization in the lending business started with Fintech companies in India. The two segments that have been the focus of Fintech lenders are individual urban consumers and the MSME segment.

Digital lending in India is a new and emerging area in the field of lending or credit. Lending through a digital platform, right from receipt of loan application to disbursement of loans, is known as digital lending. Digital lending in India gains momentum due to new technologies, new credit scoring algorithms, and an inclusive approach. The present article shall focus on the framework, benefits, and digital lending growth in India.

Introduction – Digital Lending

Digital lending India uses online technology to originate and renew loans to deliver faster and more efficient decisions. Many people know of non-bank digital lenders that market directly to consumers and businesses, but digital lending also encompasses traditional financial institutions’ activities. Digital lending in India can start as essential as an online loan application offered by a bank or credit union. It can also be as comprehensive as an entirely automated platform that further includes a full set of software, such as an online loan application, document capture, electronic signatures, credit analysis, loan pricing, loan decisions, and loan administration.

Digital lending in India can indeed act as a powerful force for financial inclusion. Innovations in digital lending enable financial service providers (FSPs) to offer better products to more underserved clients in faster, cost-efficient, and more engaging ways. The government’s rules and regulations are increasingly incentivizing digital lending models to promote financial inclusion and extend high-quality financial assistance to underserved communities and businesses.  Although integrating digital lending practices into an FSP’s operations can be challenging, it can also handle it most conveniently. Digital lending in India provides the organizations a lot of opportunities “to improve productivity, close more loans, and increase revenue per loan with cheaper, faster, and automated services.”

Impact of the Pandemic on Digital Lending in India

With a global healthcare crisis and an epic economic slowdown, 2020 has caused unusual disruptions to practically every Indian industry. The digital lending in India has not been spared either from its wrath.

The COVID-19 major outbreak has put a significant strain on the digital lending ecosystem. Liquidity management became the demand of the time, especially for SMEs and organizations. The RBI’s 3-month moratorium benefits eventually got extended to 6 months, resulting in a critical liquidity crunch for lenders furnishing small loans to micro-borrowers & having a smaller cushion of cash resources. While borrowers got a respite from loan repayment during the moratorium, it became too challenging for digital lenders to lend & recover loans during the covid period.

The economic downfall triggered by the Pandemic has exacerbated the situation. Salaried and self-employed people grapple with layoffs and pay cuts, significantly reducing their loan borrowing and repaying capacities. In this gloomy economic reality, the Indian middle class got uncertain about the future, resulting in them curtailing discretionary spending and avoiding taking loans. The ones who’ve already borrowed were either struggling to repay or had sought loan moratorium. Result? A rise in NPAs, asset-liability mismatch, and a more profound liquidity crisis.

Since 2015, Indian fintech has witnessed the rise of new players who rolled out innovative tech-enabled services like digital payments, lending, borrowings, and more, which revolutionized financial services landscape in India. In FY-19, the sector gone through a lot of transformation with regulatory reforms authorizing hassle-free customer onboarding, immediate and easy Aadhaar-based e-KYC processes, innovative credit risk assessment processes, a government push for paperless processes, and so on. The enormous potential of fintech lending in India didn’t go unnoticed by incumbent FIs like banks and traditional NBFCs. They either started building their digital lending platforms or collaborated with new-age players.

Key Factors Driving Global Growth in Digital Lending in India

Four key factors responsible for the growth in digital lending in India include:

Tech-savvy Crowd

In the world of technology, consumers are actively becoming digitally savvy. From ordering food online to shop for groceries and spending vacations online, consumers rely mostly on online booking. The change in the buyer’s behaviour has eliminated the need for physical interaction with the sellers. Consumers are relying on online reviews, videos, social media, and websites for making purchases. With the development of online channels, many exciting patterns have developed. In the financial sector, this technology has played a critical role in getting their task completed in less time. With these technological advancements, operations in the finance sector and digital lending in India has become quite convenient and possible.

Big Data and Technological Advancements

The advancements in smartphones have enabled two-thirds of the world to have access to mobile services. It has created a world of economic activities available at the fingertips of the people. With this surge in the number of users, mobile internet technology advancements are going hand-in-hand. Devices like smartwatches, cars, etc., remain connected to the internet, and these devices keep on increasing the availability of the data present online.

 The availability of a large set of data has enabled companies in the financial sector to create substantial value. The best example of this is Visa. The advancements in mobile internet technology are benefitting the financial industry. The advances in biometric technology like iris, thumbprints, instant payments, face recognition, block chain, etc., are playing a critical part in digital lending.

Upsurge Innovative Models

Innovative Operating models have emerged as the strongest pillar in fueling digital lending in India. Adopting such models by Fintech companies, financial aggregators, etc., has accelerated digital lending in India and growth worldwide. These operating models come in four main archetypes:

  • Aggregator\ Partnership model
  • Independent platform
  • Peer-to-peer platform
  • “Value +” service in addition to a core service

Aggregator\ Partnership Model

Under this model, consumers get acquired by FinTech companies, and digital lending in India gets done by partnering with the banks. 

Independent Platform

A Fintech company that lends directly to the consumers by raising debt and equity funds through institutions is a typical example of an independent platform. This type of medium does not include a partnership with the incumbent banks. Consumers can easily approach such platforms through multiple online channels.

Peer-to-peer lending

Peer-to-peer lending is gaining popularity in maximum countries. It is becoming the favorite in leading countries across the globe. Peer-to-peer (P2P) lending, marketplace lending, and other fintech credit platforms are now economically sizeable in some segments.

Value+ Service in Addition to Core Services

As the name suggests, these models are built as a “value add” to existing large businesses’ consumers. Or, we can count them as extra services to the existing consumers of the companies.

Encouraging Regulatory Environment

Digital lending is witnessing continuous global growth, and the financial regulators are working on coming up with solutions to regulate the sector to grow safely. In many developed economies like the U.K., Singapore, the US, Hong Kong, Dubai, and Australia, the regulators have created sandboxes to support and hasten the sector’s innovations. In the U.S., the New York State Department of Financial Services has issued BitLicenses for businesses dealing with virtual currencies. In China, its Banking Regulatory Commission has issued draft rules for online lending. Following the same trend, the Indian government has developed and implemented the India Stack, an open architecture platform for authentication and data access. The same is a good eye keeper on the increasing trend of Digital lending in India.

All such measures taken by the governments of different countries have enabled lenders to accelerate consumer acquisition and boost digital lending growth. Lending is undergoing a fundamental change by ditching the old banking formula” 3-1-“. The same has got possible with the global digitization of the lending process. SME’s and big businesses have readily accepted the change, and more companies are expected to opt for digital lending in India shortly.

Need for Digital Lending in India

Digital lending in India plays a critical role in favor of MSMEs and other small enterprises. Even though MSMEs in India are vastly wide-ranging, they face a common impediment – the lack of formal credit access. Though an integral part of India’s economic growth, the MSME sector struggles with access to credit, with only 10% of small businesses having access to formal credit even though they contribute 38% of the GDP. For example, think of a small store owner who wants to seek credit to stock up inventory during peak season, a small furniture store owner who wants to get the raw wood needed for building the finished product. A considerable amount of small businesses faces such situations today. Banks and NBFCs typically address only super-prime and prime customers due to a lack of credit information and the high customer acquisition cost through traditional branch models. Digital lending in India provides an excellent opportunity for FinTech companies to penetrate the MSME market using Digital technology platforms.

Capitalizing upon the Consumers’ Needs

One of the significant advantages of digital lending in India is speedier approval of credit. Credit evaluations and loan disbursals on digital platforms have significantly quicker turnaround times than traditional loans. We can go from a loan approval time of days to minutes and disbursement from a week to within hours. Another key advantage associated with digital alternative lending models is the operating cost efficiency. Traditional lending models usually have high overhead costs due to complex and rigorous manual processes. Digital lending models, conversely, have technology-enabled operational and business models that require minimal human intervention, thus reducing manual operating costs. This model allows FinTech lenders to keep fixed costs nominal and aggregate many low-value loans, enabling them to serve previously credit-devoid MSMEs. Furthermore, FinTech lenders can also pass on the benefits of lower prices to customers, making their digital lending products attractive.

Fintech’s and System Integrators respond to this market opportunity by capitalizing upon the consumers’ needs and pin points across the lending value chain for uncomplicated onboarding/ KYC processes, prompt decision making, and instant disbursals. Some of the factors why the turnaround time is significantly lower in digital lending are:  replacement of manual form filing by digital data captures, automated evaluations leveraging on technologies like advanced analytics, artificial intelligence (AI) and machine learning (ML), and no or little in-person visits. Another key feature of the modern digital lending platforms is Customized credit assessment models, which employ behavioral data to identify typical attributes for charging interest rates.

Role of Fintechs in the Era of Digital Lending in India

Fintechs in India, though at a nascent stage, is increasingly becoming an indispensable part of everyday transactions. It serves as a critical catalyst for financial inclusion in the country by creating lucrative opportunities for the poor and unbanked from a broader perspective. The shift from traditional to digital payments has proven to be rewarding for both individuals and businesses, including the self-employed, rural entrepreneurs, small borrowers, and SMEs and MSMEs. India[1] is a country with the world’s second-largest unbanked population. Fintech plays a critical role in breaking barriers such as lack of financial awareness, high-cost traditional banking services, and policy-gaps. It prevents a large percentage of Indians from being a part of the formal economic landscape.

The rise of Fintechs in India lays a greater emphasis on the customer. While traditional banks embrace a customer-centric model, Fintech players have acknowledged the dire need for increased customer-orientation. By providing customized, targeted products and services, they recognize and cater to the evolving consumer demands. Fintech startups offer convenience, personalization, transparency, accessibility, and ease of use, empowering customers considerably. Unlike traditional banking, fintech is taking a segment-of-one approach to present narrowly defined yet highly effective solutions.

Exhibiting Upward Trend

Fintech lending in India has grown up and grown out. At 87%, the country has emerged as the Fintech adoption leader, as per findings from the Global Fintech Adoption Index 2019 by EY. Once only made up of startups, this sector is now welcoming established companies and public and private sector banks. Awareness of financial technology has also increased, with 99.5% of consumers now familiar with fintech-related platforms being available to make payments and transfer money. The same indicates a positive shift and presents enormous growth potential for the industry as a whole.

Meanwhile, we expect fintech lending in India to make continuous innovations in terms of products, services, and delivery. Fintech Lending has contributed towards a robust digital lending ecosystem and its growth. Fintech lending is the elementary part of Digital Lending in India.

Benefits of Digital Lending in India

No Physical Documents 

With the concept of Digital Lending in India, the way of documentation has wholly changed. Earlier, the customers have to collect and pile up all the documents required for documentation, and then they need to submit it all to the bank. The no. of documents got reduced with digital lending in India as now customer’s e-KYC is linked to their bank account.

Quick Disbursal

As soon as the applicant’s information gets verified by the lender and all the steps required have been appropriately completed, the applicant will receive the loan amount instantly in their bank account. Digital Lending in India is responsible for the quick disbursal of finance-related operations.

Ideal Option in Case of Emergencies

Digital lending in India is the best option for any financial emergencies confronted by any business or other organizations. Fintech companies provide loans digitally in a complete Quick, online, and hassle freeway manner. Applying online to disbursal can help the needy in times of emergencies, as with the traditional lenders, one strives hard to disburse the loan amount. But the Digital Lending platform makes borrowing one ideal option for emergency scenarios in case of urgent money requirements. With digital lending, one can get cash within hours.

Ideal Option in Case of Emergencies

The Road Ahead for Digital Lending in India

As said -“every cloud has a silver lining.” Eyeing into this crystal ball, we are bound to say that COVID-19 will surely reshape digital lending in the after-pandemic plot. Businesses or corporations running on sound fundamentals will tide over the COVID crisis, and they would continue to flourish more than ever. Organizations that’ve instituted a culture of flexibility with resolute and empathetic leadership and can proceed ahead for revitalizing their business model to cater to the innovative business view that can subdue any hurricane in the future.

2021 is the year of brand-new challenges as well as possibilities for both lenders, along with the borrowers. The need for borrowing will switch from want to need for a major chunk of people who’ll endeavor loans only to finance requirements such as health emergencies, education, etc. Sachet loans are likely to be more in demand comparatively. As the entire world anticipates the vaccine and pilots the challenges of COVID-19, the new year is all set to start on a note of positivity and idealism. While the Pandemic’s macroeconomic and microeconomic hurdles will stay, businesses and individuals will gradually become more convinced of a restoration on the supply & consumption sides.

Future of Digital Lending in India

COVID has given a wake-up call to the industry to the enormous potential of digital transformation. With the booming customer demand for contactless means, more lenders must embrace technology to extend maximum convenience. Even NBFCs and traditional banks understand the need to digitize processes like risk assessment, loan underwriting, customer onboarding, disbursal, & repayment to lessen costs incurred on operations and deliver a more seamless consumer experience. With services like video-KYC, websites, Aadhaar-based KYC, and apps with cutting-edge functionalities, loan application processes would become more accelerated and more hassle-free.

For borrowers and thin-file customers, lenders will utilize technology to reach their alternate data sources like payment history, digital footprints, credit card repayment behaviour, utility bill payments, online shopping, bank balance, and more. The same helps them form a potential borrower’s risk profile and diminish risk as well. The traditional credit underwriting process would pass through a comprehensive transformation. Lenders will frequently use innovative technologies such as ML, AI, and big data analytics to collect and assess data from varied sources to assess an applicant’s creditworthiness quicker and more efficiently. With technology facilitating alternate credit scoring, lenders will be extending credit to more people, thereby genuinely forwarding the matter of financial inclusion.

Technology will proceed to meddle the digital lending ecosystem in the forthcoming period, with a reinvigorated centre on delivering improved end-to-end customer experience.

Conclusion

Digital Lending in India is the solution to all the above problems and a new age in lending. Fintech companies have combined the current technology’s financial services, making it easier for the lenders & the borrowers to avail and lend the money.The Indian Fintech landscape has led to several ground-breaking initiatives & developed innovative models to tackle its longstanding financial challenges. The value (total) of the digital lending business in India is said to exceed $1 trillion by 2023, of which consumer lending has emerged as an integral part. With the availability of limited loans and demand for colossal credit, digital lenders’ opportunity area is abundant.

Indian Lenders Association shall strive hard to promote the concept of Digital Lending in India and shall ensure a secure framework to make it work. We shall lend all possible assistance in promoting and safe usage of digital lending in India. We shall go with the trend and make it a part of our daily lifestyle. Digital lending and paperless personal loans will further evolve to help many salaried and self-employed individuals. We are hopeful that the coming year will make for a conducive growth environment and pushes beyond the last financial year’s benchmark.