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Fintech Lending in India: Streamlining the Traditional Lending Process

Fintech Lending in India: Streamlining the Traditional Lending Process

Fintech Lending in India is the growing trend and the roaring mantra for many sectors realizing its benefits. The term Fintech is derived from “Financial Technology.” It refers to software or modern technology used by businesses that provide mechanized and improved financial services. At its core, fintech lending in India is utilized to help companies, entrepreneurs, and customers in the financial operations processes using software and algorithms used on computers and smartphones.

 The fast and innovative headway has changed the way businesses manage their finances. Many startups are continually looking into using Fintech as their source of services for their financial department’s multiple roles. These days tech-savvy customers usually prefer money transfer, lending, and loan management, investing to be simple, i.e., without any person’s assistance or visit to any bank. 

Fintech Lending in India describes various financial activities, such as money transfer, depositing a cheque, raising money for any business startup, and managing investments, generally without any person’s assistance. According to EY’s 2017 “Fintech Adoption Index, one-third of consumers utilize at least two or more fintech services.” Indian Lenders Association has been adamant about encouraging Fintech Lending in India and makes it a trend.

Backdrop

Fintech lending in India is employing the latest financial technologies to streamline the traditional, out-of-date & non-transparent lending process. India’s fintech lending process has given lenders the power to speed up their payment processing times and de-mystify their policies. It has also given lenders the ability to offer personalized experiences based on each loan and mortgage seeker’s needs.

As a hub and 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 universality of mobile connectivity and the rapid adoption of the internet as a data source influencing the buying decision.

The primary mode of reaching potential borrowers in need of credit, credit underwriting, and entering into loan agreements is offline through brick and mortar outlets supported by call centers. Banks and NBFCs rely heavily on hardcopies, documents, traditional data sources like income statements and credit scores, face-to-face meetings, and wet signatures.

However, the conventional method makes technology just another support system for the brick and mortar world of doing business. The complete leveraging of technology and digitization in the lending business started with Fintech lending in India. The two divisions that have been the focus of Fintech lenders are individual urban consumers and the MSME segment.

The Need for Fintech Lending in India

The role of Fintech Lending in India is significant in the current scenario. Traditionally, the primary block of unsecured lending in India was managed by community finance – comprising family, community members, and unregulated private lenders. This segment was matured for disruption through technology and remained the focus for Fintech lending in India. Even MSMEs in India are heavily cash-starved despite being willing to submit to onerous processes and wait times. This credit gap is the new target of various Fintech lenders in India. Working capital, financing, Receivables financing, and equipment finance are the solutions that Fintech lenders in India provide to the borrower segment.

Looking at the trends of demand for retail credit, we see that disbursements have grown at a steady rate of CAGR of ~ 16% over the last five years. The further market is to be driven by consumption growth in housing, automobiles, & white goods. This increasing consumption shall lead to the aggregate retail credit demand reaching INR 53 tn by 2023 compared to INR 33 tn today. A significant portion of this growing demand will comprise the demand from underserved borrower segments overlooked by traditional lending institutions.

Happy Loans

Happy Loan is one such instance of how Fintech lenders address the needs of the MSME sector. Happy Loans, in the current business model, provides loans against receivables to the retail merchants. Happy Loans primarily focuses on retail merchants who have been acquired by merchant aggregators. Aggregators record their merchants’ electronic transactions through open-loop payment systems, mobile wallets, remittance mechanisms, etc. Aggregators are the channels through which merchants receive their dues through daily settlement. A strong tie-up with such aggregators gives Happy Loans easy access to electronic transaction data for credit underwriting. The aggregator enables the repayment of loans distributed through the daily split settlement of electronic transactions at a merchant outlet.

The entire chain of prospect acquisition, credit underwriting, loan disbursement, and repayment is entirely digital, thus circumventing the need for brick and mortar stores, physical documents, and lengthy process times. Happy Loan’s business model is supported by an AI engine that performs credit underwriting based on transaction data, making redundant data points like income statements, credit history, and credit score.

Benefits of Fintech lending in India in Current scenario

  • Fastest Rate of Approval. Fintech lending in India can increase accessibility and significantly speed up the approval rate for finance or insurance. In fact, in many situations, the application or approval process can be completed within 24 hours.
  • Greater Convenience. Many Fintech companies make great use of mobile connectivity to enhance transactions’ efficiency and convenience. With consumers using smartphones & tablets to manage their finance lending or borrowing, Fintech businesses can streamline their processes and provide an improved customer experience.
  • More improvised and Personalized Service. Fintech lending in India is a process that enjoys not only lower operating costs, but they can more quickly react to customers individual needs’ since they have better access to a range of information about them.
  • Advanced Security. Tackling the latest mobile technologies has resulted in Fintech companies investing in significant security to ensure customer data is kept safe and intact. A few of the advanced security options used by the companies include biometric data and encryption.
  • Lower Costs. Fintech lending in India can give their customers the advantage of lower premiums than those associated with the traditional firms because they rid themselves of any conventional or brick and mortar costs like rent, advertising, and salaries & instead invest money in their clients.
Fintech Lending in India

Opportunities for Fintech Lending in India

MSMEs play a vital role in India’s economy, as roughly 65 million MSMEs in India employ nearly 80 million people. These MSMEs account for 95% of the country’s manufacturing output. Despite this, the MSME[1] sector, to a great extent, has remained credit-deficient and underserved by traditional FIs.

Market Potential of MSMEs in India

  • Credit demand will see a CAGR of 6% by 2023.23
  • An unmet credit gap of approximately USD 1 trillion is to be tapped by 2023.24
  • 47% of Indian MSMEs have adopted digital tools for business processes and payments and online sales (digital in accounting, costs, sales).

Thus, with a modernized approach towards lending for MSMEs by driving government-focused initiatives and leveraging digital technology, FinTech lenders and Financial institutes can support deeper financial penetration for this segment.

Multiple new models of lending have emerged to boost credit supply, and unconventional models fuel the continued growth in lending:

Multiple new models of lending
  1. Alternative credit scoring: Using distinctive non-conventional information sources to evaluate borrowers’ financial soundness and repayment capacity can provide a better perspective on creditworthiness.
  2. Data utilization: Various data sources, like transaction data (PoS information) and utility payments can provide a micro and comprehensive view of how people transact with FIs. The information is used to offer need- and profile-specific lending products.
  3. New credit underwriting models: Open API, automation, data analytics, and AI extend a strong understructure for the new-age credit underwriting models, promising better and faster access to products and services across the credit value chain for MSMEs even in remote, infrastructural unapproachable towns and villages of India.
  4. Marketplace-like models: Using these models, borrowers can compare lending models and connect to FIs based on the best rates and covenants offered.

Conclusion

Fintech lending in India is currently playing a vital role in meeting individuals and businesses’ financial needs and disrupting conventional financial services by reaching out to unserved or underserved segments. Adopting technological innovations across the lending value chains will help optimize resources and processes. The success of Fintech lending in India will primarily be dependent on their ability to make the best use of technology, human capital, and strategic partnerships.

Fintech lending in India has the right technological support and can form a mutually beneficial relationship to amplify, helping customers from all socio-economic backgrounds. Further, government and regulatory bodies have a significant role in drafting, implementing, and monitoring comprehensive policies strengthening overall fintech lending in India. As an Indian Lenders Association, we strongly recommend fintech lending, considering its benefits in the long run. Bold reforms like Fintech lending in India are the need the hour to re-kindle the enabling environment of the Fintech ecosystem.