Technological innovations have led to marked improvements in efficiency,
productivity, quality, inclusion and competitiveness in extension of financial services, especially in the area of digital lending.
Digital lending is one of the fastest-growing fintech segments in India and it grew exponentially from a volume of U.S. dollars 9 billion in 2012 to nearly 110 billion dollars in 2019. It is further expected that the digital lending market would reach a value of around 350 billion dollars by 2023.
This business was mainly covered by fintech startups, neo banks and Non-Banking Finance Companies (NBFCs). Commercial banks are also fast joining the genre of financial intermediaries either lending digitally on their own or joining with NBFCs to share the synergies.
It is believed that ease of accessing digital financial services, technological innovations and cost-efficient business models will eventually lead to meteoric rise in the share of digital lending in the overall credit.
What is Digital Lending?
Digital Lending means ‘access of credit intermediation services majorly over digital channel or assisted by digital channel’. The characteristics that are essential to distinguish digital lending from conventional lending are use of digital technologies, seamlessly to a significant extent, as part of lending processes involving credit assessment and loan approval, loan disbursement, loan repayment, and customer service.
Digital Lending can be performed in two ways: 1) Independent platform: An independent platform is typically a fintech start-up which lends to consumers directly (predominant operating model) without partnering with an incumbent bank. It does so by raising debt and equity funds through institutions.
2) Aggregator / Partnership model: In such a model, fintech’s acquire consumers and lend to them by partnering with Banks.
The synergy of robust customer base created by banks in the last ten years, more importantly after the launch of Pradhan Mantri Jan Dhan Yojana (PMJDY)scheme in August 2014 is now available to lenders.
The recently articulated Financial Inclusion Index of RBI reflects on the spread of banking network with multiple touch points including business correspondents. Financial inclusion has helped the last mile connectivity that should be harnessed well to deliver credit to needy.
The annual FI-Index for the period ending March 2021 is 53.9 on a scale of 1 to 100 as against 43.4 for the period ending March 2017. There is considerable improvement in connecting people with the formal financial system. Such class of entrepreneurs can use the loan funds to do businesses and add to the GDP growth.
Why Digital Lending?
Digital lending companies (DLCs) provide comparatively small loans to their customers through apps or online platforms.
In comparison to bank loans, digital lending does not require a long banking relationship or a rigid appraisal or onsite visits and other credit processing methods.
They need just a bank account as a reference point where loans can be credited. The digital information about the prospective borrower is now accessible to lenders though tax returns, GST filings, if any, rating from the credit rating agencies, Aadhaar card for identity, Digi lockers and so on. The address proof, proof of economic activity and related information is initially uploaded by the borrower seeking loans.
The process of offering loans to the borrowers is shifted from person to person contact to virtual mode.
The credit decision is automated based on preloaded algorithm eliminating manual intervention and weeds out chance of any bias. DLCs are obviously faster, requirements are lower when compared to traditional sources of availing loans from Banks/NBFC’s.
After RBI issued regulatory guidelines on October 4, 2017 for Peer to Peer (P2P) lenders, their numbers started growing similar to DLCs.
The products of DLCs are wide ranged from small personal loans for buying a new TV, consumer loans and educational loans, car, or even small housing loans. The main advantages of digital lending are comfortable and easy access via mobile devices. Less paperwork and liberal eligibility checks than in a bank makes it more attractive.
With higher technology use, the DLCs have to upgrade the management of operational risks built in credit risk. Skill upgradation, systems audit of technology tools and systemic controls have to be constantly under watch to ensure that the merits of digital lending sustain in the long run. Governance, Risk and Compliance (GRC) should remain actively functional with its built-in checks and balances in place to ensure that DLCs contribute to economic growth. Digital lending will gradually make its bigger space in credit delivery as more and more banks join the digital lending stream under Co-lending Model (CLM) permitted by RBI in September 2018.
Is it Safe?
The larger issue here is protecting the customers from widespread unethical practices and ensuring orderly growth. As has been seen during the pandemic-led growth of digital lending, unbridled extension of financial services to retail individuals is susceptible to a host of conduct and governance issues. Mushrooming growth of technology companies extending and aiding financial services has made the regulatory role more challenging. In view of the ease of scalability, anonymity and velocity provided by technology, it has become imperative to address the existing and potential risks in the digital lending ecosystem without stifling innovation.