Digital lending in India is on the rise and is disrupting the industry, driven by the advantages of superior customer experience, faster turn-around time, new and emerging business models, and technology like cloud infrastructure, Artificial Intelligence, and Machine Learning. While digital credit disbursal is seeing a surge bringing in heaps of benefits including reducing costs for banks, there is also the threat of illegal and unsecured lending apps needing regulators’ attention.
As per a PWC report, the digital lending market in India will have a growth rate of 48% by 2023.
Digital Lending has seen a steady rise in India with several start-ups and NBFCs paving the way in 2022, catering to a population that is new to banking and new to credit, like millennials, Gen Z professionals, and the under-served. These salaried individuals in Tiers 2, 3, and 4 cities are often denied loans by banks and NBFCs due to a lack of credit history or not being prime customers. Digital lending is expected to grow rapidly with loans to small and micro enterprises seeing a massive surge.
The rise of smartphones has a huge role to play in the adoption of digital avenues. With the internet reaching the remotest areas of the country, digital lending is effectively reaching those with limited or no access to financial services. Customers can register from a smartphone making transactions easier. Start-ups are offering innovative products which are now capable of overcoming geographical limitations, reducing transaction costs, and enhancing the customer experience. With the lending process becoming contactless and with diverse customers, there has been a variety of digital lending models, each dealing with financial inclusion in unique ways. COVID-19 further pushed the shift to digital and contributed to the digital lending market growth.
As digital lending explodes across the country, there have been growing concerns about manipulative practices, illegal lending, and mounting threats. Especially during the pandemic, apps promising quick cash mushroomed and preyed on first-time borrowers with high-interest rates.
With India’s large population and the majority of Indians not having access to formal credit, it is the lending apps that they rely on. However, with outdated personal bankruptcy laws, it is tricky to protect borrowers who find it difficult to discern the legal from the illegal. There is a high demand for credit and with the traditional financial system not being able to meet the need, digital platforms are catering to the demand with exorbitant interest rates.
After concerns were raised by Indian officials, technology companies and regulators have come together and cracked down on these apps. Google reviewed and blocked hundreds of apps globally from its Play Store to protect borrowers from deceptive and exploitative terms. Officials in other countries also followed by shutting down suspicious start-ups promising easy cash. Platforms are now required to show the appropriate lending licenses and they cannot ask for full repayment in less than 60 days.
While the Reserve Bank of India is focusing on wiping out unregulated lenders and considering tight digital lending guidelines including severe penalties on non-compliant apps, there is the risk of unscrupulous lenders stepping up manipulative practices.
Today, financial institutions in India are at a crucial point where they need to adapt to the digital way of life and move ahead. To enable sustainable digital lending growth, they need to focus on –
Digital lending led by new-age start-ups has the potential to become the new normal and bring in a huge growth opportunity for the Indian eCommerce sector as well. Digital lending will continue to grow and improve by offering pioneering technology-driven solutions. With adherence to regulations, digital lenders will ensure hassle-free access to credit and rise to become a dependable credit source for millions.
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