How AI Has Revolutionized The Digital Lending Sector AI's predictive capability plays an important role in seamlessly analyzing borrowers' past behavior and monitoring current behavior, say experts

Digital lending is gaining momentum like never before. Be it fintech startups pivoting completely to lending or adding a lending layer or prioritizing lending over other verticals, digital lending is driving growth for companies. Some cases in point are CRED acquiring Creditvaidya to focus on lending, BharatPe launching a separate consumer lending business PostPe and Paytm's financial situation improving drastically reportedly due to its lending business.

Lending has become a significant growth driver for non-fintech startups as well, especially the ones dealing with higher ticket sizes. For instance, Car Dekho has launched its digital lending platform called Rupyy. Upstox, Udaan, Spinny, CredR, Bajaao Music are some of the other startups that have gone the lending way. For businesses like Spinny, it makes sense to help consumers with hassle-free loans. It has tied up with HDFC Bank, ICICI Bank, Axix, Kotak and a few others to facilitate the same.

"India being a perpetually credit-deficient society, innovative lending solutions present a relatively easier play for personal needs and corporate lending," said Ashwani Singh, managing partner, 35 North Ventures India Discovery Fund. Most of these startups have been scaling very fast.

The most important reason behind this growth is the far-reaching impact artificial intelligence has had on the sector.

Advantages AI offers

AI models have the ability to be seamlessly integrated into the credit underwriting and collections frameworks of lending companies to improve the outcomes materially. "In an industry that has traditionally been characterized by lengthy application processes and lack of sufficient data to underwrite new-to-credit individuals, AI has the potential to leverage data analytics on alternate data to be able to create a much more robust underwriting model," said Pearl Agarwal, founder and managing director, Eximius Ventures.

AI's predictive capability plays an important role in seamlessly analyzing borrowers' past behavior and monitoring current behavior. "AI-driven lending makes the underwriting of customers a more seamless and faster process thus, motivating customers to use digital credit avenues," added Ankur Bansal, co-founder and director, BlackSoil.

Moreover, one of the catalysts for the use of AI in lending is the launch of the Account Aggregator (AA) framework. "The AA framework expedites the lending process by offering a unified, organized view of a customer's financial data. AI solutions built on top of Account Aggregator can offer a deep understanding of a customer's financial standing on an ongoing basis," she added.

Further, the impact of generative AI on business lending is also far-reaching. Its potential to enhance credit risk assessment, streamline processes, personalize loan offerings, early detection of fraud, enable real-time decision-making, enhance customer experiences and promote continuous learnings for the engine to become more accurate makes it a powerful tool for digital lending startups, says Bhaskar Majumdar, managing partner, Unicorn India Ventures.

Scaling up with technology

Today, leveraging advanced technologies has become the primary reason behind non-fintech and non-lending startups jumping into the digital lending bandwagon and finding success in the same.

"Advanced technologies such as AI have made it easier for new-age embedded fintech technologies to scale up quickly. Non-fintech, non-lending platforms such as social commerce, e-commerce or marketplaces can now gather large amounts of data on their customers to underwrite them more seamlessly. The ability to process, analyze, and make sense of vast amounts of data in real-time is an indispensable tool in the lending process. It makes loan processing more accurate, reliable, and faster, substantially reducing the barriers to entry for startups," said Agarwal.

Additionally, experts also say that AI-based decision-making systems now allow new entrants to the lending market to compete with established traditional lenders by replacing experience with richer data sets. However, along with the benefits offered by advanced tech and usage of AI, changes in the regulatory framework in India regarding digital lending is also driving the space. "These companies need to be regulated lending entities rather than mere platforms and they need to have commensurate balance sheets. This would slow down rush of generalist fintech companies to get onto the lending bandwagon," said Majumdar.

Untapped potential

Despite the massive strides AI has made in the last couple of years in the lending industry, currently, India is still in the early stages of fully leveraging its potential, say experts.

"For AI to be fully integrated into lending stacks, access to data and accuracy of data will become extremely important. While some of that can be solved with Account Aggregators, access to alternate data is still dispersed. Moreover, along with data access, companies will also need to develop strong data analytics models to be able to drive correlation between various behavioral patterns such as location, income, age, monthly spends, types of spends and lifestyle habits to be able to determine the credit worthiness of an individual," said Agarwal.

Digital lending is one of the fastest-growing fintech segments in India and grew exponentially from &9Bn in 2012 to nearly $150 Bn dollars in 2020. It was expected that the digital lending market would reach a value of around 350 billion dollars by 2023. "The future will lead to more customizable products created for individuals based on their requirements and will also see further reduction in delinquencies using more efficient and better "taught" credit engines," added Majumdar.

The overall consensus is that while some of the AI technologies are developed in more advanced nations, open data ecosystem frameworks and capabilities in India are coming of age and the Indian lending tech market is as advanced if not more than the US market.