Digital Lending - Revolutionizing the loan Market in India

In addition to allowing individual's access to personal loans, players in digital lending have also expanded their customer base and their loan portfolios

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By Rahul Agarwal


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Digital lending as the name suggests refers to the process of getting a loan digitally with minimum paperwork, the entire process of submission of the loan application to the final disbursement of the fund is done over the Internet. With enabling policy environment and technological advances, digital lending as a phenomenon has really caught up in India, the digital lending revolution is led by innovative fintech companies and has re-defined the rules of traditional banking in India.

Digital lenders have capitalized upon the consumer's need of securing instant funds through a seamless experience and are able to leverage data heavily to completely automate underwriting of loans. The new age tech platforms are now aiming to be sleeker and more data-driven than traditional banks, which often use cumbersome and overly onerous methods to establish creditworthiness when giving out loans.

Growth in the Digital Lending Space

Two primary reasons for the exponential growth in the digital lending space are the enabling policy of e-KYC where a user can verify their demographic details and other relevant information needed to fulfil regulatory requirements using the Aadhar framework and the formalization and acceptance of the Indian credit rating system. These two positive developments have made it possible for fintech to rapidly onboard customers online with minimum paperwork and to evaluate individual credit risk through complex mathematical models objectively. Once the customer is on-boarded and his/her creditworthiness can be evaluated objectively making a decision of approving or disapproving the loan is the easy part.

The New Way for the Things to Work

Traditionally, banks and non-banking financial companies (NBFCs) have rigid guidelines that sometimes work against individuals who are in need of small loans, for example, if one wants to apply for a personal loan with a bank, the minimum amount should be Rs One lakh and one has to have a salary of minimum INR 30,000 and a good credit score. Around 40peer cent of digital lender's customers may not be able to get a traditional bank loan; either they are too young or their credit scores have not matured. The reluctance of banks and NBFC's to enter the supposedly risky small loan segment has enabled digital lenders to quickly fill the void and acquire a large customer base. Digital lenders do not need a physical branch network as all operational functions are done digitally over the internet and therefore they are able to keep their fixed costs lower, the benefits of which when passed on the customer makes digital lending especially attractive for customers.

In addition to allowing individuals' access to personal loans, players in digital lending have also expanded their customer base and their loan portfolios. Digital lenders are now aggressively attending to the credit needs of the small business/MSME's and the informal sector. This is one segment which has been historically ignored by the traditional banking system and as per estimates a credit gap of approximately $230 Bn still needs to be filled up and as per tends, the void is being aggressively filled by digital lenders.

Over the last couple of years, more than 1000 fintech startups have been founded in India with funding of more than $2.5 billion. These new age fintech are disrupting traditional financial services at a pace never seen before, across the spectrum, from lending to investment. Fintech startups have totally changed the lending landscape through innovative and scalable business models. Some of the innovative lending models include:

  • Point of Sale transactions based lending (NeoGrowth)

  • Bank-fintech partnership model (Indifi, Capital Float)

  • Invoice discounting exchanges (KredX)

  • Loan Marketplaces (Paisabazzar)

  • Bank-led digital models (Kotak Mahindra Bank's 811 application, HDFC Bank's 10-second personal loan)

  • Captive model especially by non-financial players (Uber, Ola partnering with Banks to finance drivers, Xiaomi partnered with KreditBee to provide credit to its consumer in India)

  • Peer to peer (P2P) lending (Faircent, Lendingkart, Finzy, i2iFunding)

The successful implementation and the exponential growth in the digital lending space have now forced traditional banks to redefine and adapt their business models with changing times. Banks have started working with fintech startups across the spectrum to streamline their existing processes and to catch up on the innovation that is happening in the space. As per a recent industry report, digital lending in India can grow up to Rs 6-7 Trillion ($80-100 billion) by 2023, amounting to a 10x to 15x increase in annual disbursements. The future for the digital lending space is bright, there is room for a lot of innovative offerings as the low-cost scalable business models inherently supports innovation. Today's generation is impatient and the lure of instant approval, paperless loans is what drives the success of leading fintech companies in the digital lending space.