April 18, 2024
Digital Lending

Digital Lending: Transforming the Lending Landscape

Emergence of Digital Lending

Digital lending has emerged as one of the fastest growing segments in the fintech industry in the past few years. With the proliferation of smartphones and internet connectivity, more and more people are adopting digital means for their financial needs including borrowing. Digital lending platforms offer loans to individuals as well as small businesses through a completely online and automated process without the need to visit a physical branch. By leveraging technology heavily, these platforms are able to process loan applications at a much faster pace compared to traditional lenders and also improve access to credit for the underserved segments.

Growth of Digital Lending in India

In India, digital lending has seen exponential growth especially after the nationwide lockdown due to COVID-19 pandemic as people preferred contactless lending. As per a report, the Digital Lending in India is estimated to reach $350-500 billion by 2023 growing at over 20% annually. Some of the major factors that have contributed to this rapid growth are:

Underpenetrated credit market – Credit penetration in India is still very low compared to developed markets despite decades of bank nationalization. Digital lenders are helping expand the credit reach.
Emergence of new business models – Platforms are developing innovative business models to assess creditworthiness of new to credit borrowers using alternate data points like education qualification, social media profiles etc. instead of just relying on income/finance documents.
User experience focusedDigital Lenders focus highly on customer experience right from loan discovery to disbursal and collecting repayments, making the whole process very seamless and convenient.
Fast approvals – Due to automated processes, digital lenders can approve and disburse small ticket personal loans within minutes and days for larger loan amounts compared to traditional banks.
Lower costs – Operating online allows platforms to cut costs significantly which gets passed on in the form of lower interest rates and flexible repayment options to customers.
Growing fintech investor interest – Significant funding from financial and strategic investors have accelerated the growth momentum of digital lenders in the country.

Expanding loan offerings

Now in the mature growth phase, digital lenders are expanding their loan offerings beyond their traditional personal loan products:

Small business loans – Many digital lenders have launched tailored small business loans exclusively for micro, small and medium enterprises up to Rs.50 lakhs loan amount. Business parameters like GST returns, bank statements, stock entries etc are analysed online to assess creditworthiness.
Two-wheeler loans – Affordable financing options for new or used two-wheeler purchases through simple online loan applications are becoming popular among young salaried individuals and gig workers.
Gold loans – Holding gold jewellery as collateral, digital gold loan platforms provide instant loans at competitive interest rates. Gold is appraised virtually and loans are disbursed directly into borrowers’ bank accounts.
Education loans – For higher education financing needs ranging from school fees to professional degree courses, digital lenders partner with top educational institutions to offer customized loan solutions to students and parents.
Home improvement loans – Loans targeted towards home improvements, renovations and repairs are being launched considering the current housing demand especially in tier 1 and 2 cities. Property documents are digitally evaluated remotely.

As various lending segments continue to mature, digital platforms are expected to foray into new loan categories like vehicle loans, property loans and point of sale credit over the next few years. Their biggest advantage lies in developing flexible underwriting models using fintech capabilities that can expand financial access to the under banked populations.

Changing lending landscape

Digital lending has undoubtedly transformed the lending experience both for borrowers and lenders in India. Traditional lenders are also revamping their processes and launching digital lending initiatives to compete with these specialized platforms and maintain their market share. Industry experts expect a hybrid model involving collaborations between banks and fintech firms would dominate the lending landscape going forward. Few key implications of digitization on the lending environment are:

Banks moving online – Banks have accelerated digital transformations, introducing instant personal loan apps, web platforms for MSME/business banking loans along with tie-ups with major fintech companies.
Data driven decisions – Both traditional and new age lenders are increasingly relying on alternate datasets and advanced analytics to make better risk assessment and improve underwriting capabilities.
Flexible credit models – Platforms explore methods like credit scores based on digital footprints, social circles, purchase patterns instead of conventional credit bureau scores.
Embedded finance trends – ‘Buy Now Pay Later’ , point of sale credit are examples of lendtech being offered through e-commerce and merchant platforms on online checkout pages.
Regulatory developments – RBI and government are progressive in nurturing innovation through new guidelines, policies around data privacy, collection of interest on digital loans etc to promote fintech without compromising on prudency and financial inclusion.

With financial access challenges remaining and open opportunities, digital lending stay on an exciting growth trajectory to revolutionize how credit is delivered in the country. While giving a push to financial inclusion, the ecosystem players also have responsibilities around responsible lending practices and consumer protection. An optimal blend of innovation with regulations would be instrumental for its long term sustainable development.

Note:
1. Source: Coherent Market Insights, Public sources, Desk research.
2. We have leveraged AI tools to mine information and compile it.