Digital Lending in India: Opportunities & Threats

Updated On : March 2022

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.

The rise of Digital Lending

• New-age fintech lenders are enabling financial inclusion across the country by developing ingenious products to cater to rural, semi-urban, and low-income customers in unorganized sectors. They are helping them avail loans from home, with minimal paperwork and quick processing.
• Fintech lenders are adopting cutting-edge technological capabilities like AI, ML data analytics, and open application programming for insights into customer buying and spending patterns for building alternative credit models.
• The government while actively promoting the Digital India initiative, is also promoting regulatory interventions for the growth of digital lending with a proposal for a separate division for fintech firms.
• All AI/ML-based systems analyse the data of customers to check creditworthiness and risks involved in lending. These systems constantly update their algorithms becoming stronger and risk-free over time.
• Digital lenders have more risk appetite than banks, which lets them lend to lower-income groups. They offer unique products like micro and short-term loans and help lower-income individuals to build a credit history with small loans, without falling into debt.

The key benefits of Digital Lending are -

• Easier loan disbursement
  The digital lending platforms used for the loan disbursal process have minimized the geographical barriers allowing borrowers to quickly take up loan applications. They come with easy data entry, personalized user experience, and smooth loan application procedures.
• Easy to capture applicant detail
  With digital lending, the chances of human errors are minimal as it is easier to capture an applicant’s details. The validity of documents can be scanned digitally making the process quicker and error-free.
• Guarantees quick decision making
  Digital lending facilitates instant loans which is an advantage for applicants. By accepting digital automation lenders can hasten the application approval procedure with automatic decision making. They can quickly view the applicant’s credentials and documents through the verification and decision process. 
• Increases efficiency
  A digital lending platform can cut down overheads by half and increase efficiency at the same time. Digital lending saves time, boosts revenue, growth and improves lender borrower relationships.
• Better lending consistency
  There are no irregularities in underwriting decisions with digital lending. It also guarantees great consistency in lending decisions offering an easy application process, rapid decision making, and an adaptable lending process. Digital lending technologies make the entire process quick and allow lenders to revert quickly to the applications.   
• Better customer experience
  Digital lending has a quick turnaround time, is transparent, and relieves applicants from the long waiting period for a credit decision. It is convenient and saves customers time. For banks, it also reduces the cost of managing loans, reduces time spent on underwriting loans. Hence, banks can process more loans and products and offer a better experience to borrowers with quick loan approval and funds.

Handling the rising threats

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 –

• Re-imagining the customer experience
• Developing data-driven lending programs
• Adopting automated decision making
• Adopting AI /ML led monitoring and collections

Conclusion

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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