Banking the Unbanked: India’s Renewed Focus on Digital Lending

Driven by favourable socioeconomic factors, digital lending has grown exponentially in the last decade. With rapid digital adoption, a spike in loan disbursements, and the formidable growth of the FinTech sector as a whole—digital lending is projected to become a $1.3 Tn market opportunity by 2030 as per Inc42’s report ‘State Of Indian FinTech Report Q3 2022’.

Due to the faster approval of credit, digital lending has significant advantages over traditional lending and plays a key role in addressing prevalent credit-related challenges in India. The application of pioneering technologies coupled with the government’s ‘Digital India’ initiative and subsequent push for improved digital financial infrastructure are key factors fuelling the lending revolution in India.

All this has resulted in digital lending providing a strong impetus for financial inclusion. Amid surging demand for online loans, digital lending has become the fastest-growing FinTech segment in India and is powering underserved segments like the Micro, Small & Medium Enterprises (MSMEs) that are battling with a massive credit demand-supply mismatch.

The undeniable effect of digital lending on financial inclusion

Although India is one of the fastest-growing economies in the world, access to credit continues to be among the major impediments that are slowing down the socioeconomic development of the country. Within the larger sphere of financial inclusion, the lack of access to funds and borrowing opportunities are the bigger challenges that need to be addressed.

India’s economy today grows on the pillars of financial inclusion, where equipping individuals and businesses across the social spectrum with timely access to affordable funds has become critical for sustainable growth.

The MSMEs, India’s growth engines are among the many segments that lack access to formal credit. There are nearly 110 Million Indians who are part of the growing MSME sector in the country and they contribute nearly 30% to India’s GDP. That said, they have an enormous credit gap of USD 600 Billion. Owing to their informal nature of operations, and lack of financial data such as historical cash flow information—banks find it challenging to assess the creditworthiness of MSMEs. Enabling greater credit access and improving the affordability of financial services will be critical to reviving the distressed MSME sector and significantly improving their global competitiveness.

The FinTech boom has brought forth a paradigm shift in the lending landscape, forever changing the approach of credit delivery in the country and helping us edge closer to India’s vision for digital lending. MSMEs who have struggled to secure credit from traditional lenders have flocked to new-age tech enablers who offer alternative lending solutions. From digital onboarding to quicker disbursements, MSMEs in the country are now drawn to the digital route of availing funds for their business. Digital technologies have played a key role in backing MSMEs located in remote areas with easier and faster access to products across the credit value chain.

Digital transformation and its far-reaching effects

Traditionally, the lending process has been a lengthy one plagued by outdated systems, time-consuming workflows, and long-drawn approval timelines. With technology and innovative digital solutions powering the financial services landscape in the country, we see new-age FinTech firms coming to the forefront to reimagine credit evaluation and loan origination processes.

End-to-end digital transformation has taken the lending business to the next level, enabling FinTechs to expand their reach, develop innovative products, and tailor loans to suit the unique requirements of the customers. By leveraging cutting-edge technologies such as Artificial Intelligence (AI), big data, and Application Programming Interface (API), FinTech lenders are launching hyper-personalised products catering to the low-income and rural segments of the country that are underbanked and lack appropriate access to formal credit and financial services at large. Instantaneous loan approvals have replaced tedious paperwork and manual processes. FinTechs are using smart technologies, advanced algorithms, and automation capabilities to speed up document processing, underwriting services, and approvals.

FinTech lenders need to focus on digital imperatives that allow them to develop new business models that will reduce operational and customer acquisition costs. They need to be able to offer easier access to affordable credit while managing an increasing volume of customers in a growing economy such as India.

Backed by aggressive automation around credit decisions and instant disbursals, FinTech lenders are using alternative models of credit scoring and underwriting to boost the supply of credit.

Key digital lending trends in India

From peer-to-peer (P2P) lending to invoice-based lending and cash flow-based lending, we see the rise of new business opportunities to offer affordable and scalable financial services, particularly in the lending space. FinTech firms are revolutionising and modernising the loan procurement lifecycle with digital native solutions. Some of the emerging technology trends that are transforming the lending space include:

1. New-age credit scoring models:

FinTechs are leveraging distinctive non-conventional data sources such as POS transactions and utility payments to assess a borrower’s creditworthiness and the risks associated with lending a loan. Artificial intelligence and machine learning are used to analyse alternative information about the borrower and assign a credit rating to the applicant. These credit ratings are utilised by banks and NBFCs to get a better understanding of the repaying capacity of the borrower and, in turn, fix financing costs, rate of interest, and other lending terms.

2. Cloud-based lending systems

One of the most prominent trends has been cloud computing as it enables digital lenders and customers to work in a common interface, ensuring a consistent lending experience across channels. Lending firms are also able to store, manage and process a growing amount of data in the cloud and track the status of loan applications easily.

3. Alternative credit underwriting models:

APIs, Robotic Process Automation (RPA), and data analytics are being used extensively to devise accurate underwriting models, automate manual tasks, and deliver relevant offers on preferred channels. From streamlining application flows to secure identity verification, these technologies are playing a major role in enhancing the customer experience.

RBI’s guidelines on digital lending

Last year, the Reserve Bank of India (RBI) issued new rules to regulate and streamline digital lending activities in India. These guidelines emphasised the need for digital lenders to ensure customer-centricity and greater transparency in offering products through digital platforms. The new rules prohibited the automatic increase in credit limit without the explicit consent of the borrower. As per the new norms, loan disbursals and repayments are to be made only between the bank accounts of the borrower and the regulated entity, restricting the use of pool accounts while routing disbursements. With the government’s recent decision to crack down on unregulated digital lending apps, FinTechs are now subject to increased regulatory efforts.

India’s futuristic digital lending ecosystem

As FinTechs are looking to maximise the potential of digital lending while navigating a complex web of compliances and regulations, the RBI’s regulatory framework is structured to bring in an orderly expansion of digital lending in India. With technology continuing to disrupt the lending ecosystem, FinTechs such as CredAble are all geared up to ride the wave with sophisticated lending solutions and strategic partnerships with financial institutions.