2020: A Turning Point For the Digital Lending Industry
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Loan disbursal has always been a paperwork intensive task; right from submission of loan application to final approval, an average borrower would be seen carrying a heavy file of documents to secure a loan from the lender. This would be followed by multiple authentication processes.
Come March 2020, the lending industry, like all others, was faced with a challenge to stay resilient and relevant when all economic activities moved on to digital platforms. The digitization of the lending industry was fast-tracked; according to Omidyar Network, the MSME digital lending has the potential to see a 10- to 15-fold growth to reach INR 6-7 lakh crore ($80-100 billion) in annual disbursements. In a labor-intensive country such as ours, digital lenders are a critical part of India’s fintech ecosystem and government’s mission of Atmanirbhar Bharat.
Digital lending picked up pace during the global pandemic as many people were devoid of their livelihood, especially the self-employed personnel, creating a need to have easy access to credit.
Unlike the 2008 financial crisis, the financial services industry was better prepared this time. They were already implementing technology solutions to automate backend processes, leverage big data to derive intelligent insights and offer a superior customer experience, long before the pandemic. The lockdown enabled a multifold acceleration in terms of pace of adoption of new technologies. Today, technology has enabled digital lenders to optimize their onboarding process. With alternative data sources, lenders are able to automate underwriting and use predictive analytics to assess the credit worthiness of the borrower in the minimum possible time. The demand for app-based loan services or digitized lending available on ‘tap’ was further driven by the technology-savvy consumer market. According to Boston Consulting Group, annually Indians conduct 340 billion online searches, view 810 billion Web pages, make 300 million e-commerce transactions and 8 billion digital banking transactions. On one hand with this data boom and, on the other hand, leveraging advanced technologies such as artificial intelligence and machine learning, digital lenders, today, are able to enhance customer experience, reduce customer acquisition cost, refine the underwriting models and deploy early warning or risk assessment systems.
The government and regulatory bodies in India have created a lucrative digital ecosystem in India to promote digital financial services. With initiatives such as India Stack, a set of APIs that allows governments, businesses, startups and developers to utilize a unique digital Infrastructure to enable consent-based data sharing across the country, and by offering open architecture layers such as UPI, Aadhaar, e-signs, e-KYC and video KYC, the government of India has made significant assets to make digital lending economically viable and boost the industry.
India has over 60 million MSMEs, who contribute a major chunk to India’s national employment and GDP. But the lack of a formal channel of loans has acted as a hindrance in realizing their full economic potential. In fact, most of these MSMEs lack proper paperwork required to even apply for a loan. In the last year when economic activity had come to a standstill due to the nationwide lockdown, digital lenders provided a cushioning to such enterprises to stay afloat as their revenue generation took a huge hit. With the use of digital applications, automated verification, paperless transaction and automated underwriting, digital lenders were able to eliminate the cumbersome steps in traditional lending and reduce the time to lend. In fact, to support India’s MSMEs sector, many players in the digital lending space rolled out encouraging offers such as flexible repayment, revolving credit or working capital loans during the pandemic.
Lending digitally in 2021
This year, as different sectors recover from the economic strain of COVID-19, the need to borrow will change from want-based borrowing by end consumers to need-based borrowing by small businesses and entrepreneurs among others to revive themselves. The demand for personalized, cost-effective and rapidly delivered contactless loan products will rise. End-to-end digital platforms supported by automated workflow will replace traditional credit channels. With the rising number of mobile and internet users in India, digital lenders can now reach out to the unserved group of prospective borrowers in semi-urban and rural India.Moving forward, fintech lenders will depend less on physical financial statements and will deploy a cloud-native digital infrastructure to build an easy-to-use and secure digitized loan assessment and disbursal process. More and more traditional banks will collaborate with niche fintech players to accelerate digital lending and use machine learning as well as artificial intelligence capabilities for an omnichannel approach to lending.