The traditional process of lending money through banks in India is crippled due to numerous multi-stage problems starting from high fees for the loan application, the long turnaround time for approving the loan due to cumbersome paperwork and background checks, as well as following up on the status of one’s application by constantly circling lenders. Along with these barriers, the focus on collateral-driven lending has increased the gap between the demand and supply of credit in the country which highlights a major need-gap for alternative lending firms to capitalize upon.
The rise of the new trend of digital lending has used the leverage provided by technology to make the process easier, quicker and flexible across all domains. In the last decade, the alternative lending industry in India is undertaking the task of providing quick, easy, and accessible credit for all borrower needs, ranging from individual customers to MSMEs. Additionally, this makes financial services accessible for the under-financed demographic. While demonetisation coupled with certain regulatory incentives boosted the opportunities for alternative lending in 2017, the financial landscape in India is set for a holistic transformation in coming time. Digital lending in India is set to become a USD 1 trillion opportunity in the next five years as reported by Boston Consulting Group (BCG). Additionally, various lending models such as marketplace lending, online P2P lending, crowdfunding, etc have emerged to cater to the complex and evolving digital lending landscape.
The what, why, and how of digital lending
Digital lending solutions are flexible, user-friendly, and customizable, as they are equipped with AI, data analytics, data visualization, and have a wide-ranging acceptance amongst varying target segments, thanks to the rise of smartphones and expanding internet penetration. Salaried individuals, self-employed people, and SMBs are increasingly relying upon digital P2P companies. These P2P companies employ innovative data sources and proprietary algorithms to assess the credit worthiness and repayment capacities of applicants. Subjected to an advanced data analytics of their personal, professional, social and financial details; borrowers undergo a stringent underwriting mechanism. Post verification of one’s credit profile, these details are then published on the website for the visibility of lenders. This allows lenders to identify qualitative borrowers and score better margins along with timely returns, as well as equips borrowers to have better and faster chance of getting loan at a competitive rates from vast pool of potential investors available at these platforms. This hassle-free tech-led process also reduces the standby time for customers and makes it quicker to avail a loan irrespective of one’s geographical location. Saving both money and time while allowing easier credit approvals, this ease of borrowing extended by digitalisation ensures that middle-income individuals in India no longer need to be acquainted with exhausting procedures and documentation to finance their needs.
Digital lending for India’s financial future
Not only are digital firms emerging with at an unrelenting pace, but the growing demand for credit of more than 600 million Indians with varying customer needs and the rapidly shifting market variables in each fiscal year, have also resulted in traditional lenders digitalising their otherwise manual lending process. They are resorting to adding digital acquisition channels or digital repayment options, for instance, a few tech-enabled lenders in India provide a ‘tech and touch’ approach by supplementing their physical distribution networks with technology.
The popularity amassed by online P2P lending is bound to grow exponentially, as it is expected to become a market opportunity worth $4-5 billion by 2023. Moreover, the inception of forward-thinking fintech firms and services like India Stack, eKYC, APIs are revitalising the economy by offering quick and affordable credit to the under-financed MSME sector across demographics. This is vastly responsible for accelerating economic growth in tier II, III and IV cities, as small-ticket borrowers can now avail finance for their personal, business or educational requirements through an efficient process. Between 2016 and 2018, the alternative lending sector has grown at around 106.4% year-on-year to reach a cumulative value of USD 241 million in the present. This era of massive technological shifts has revolutionized business opportunities across all verticals, and clearly indicates that digital lending backed by more favourable government policies will transform the financial situation of the average Indian in the foreseeable future.