Traditional to Digital: The Changing Dynamics of India’s Lending Pattern

For an economy to thrive, financial inclusion must be seen as a crucial pillar. It safeguards the interests of all consumer segments and is inclusive of all demographics. Technological innovations in financial inclusion help reduce the exploitation of the credit-invisible strata. Traditionally unorganised channels have become even more critical in a post-Covid world. It has been sensitizing people to all kinds of financial uncertainties and lending during necessities.

Consumers are becoming increasingly digitally savvy. In today’s world, which is in a state of flux and continuous metamorphosis, they use ride-sharing apps to work. They order lunch on their smartphones, stream movies and shop for clothes online. Additionally, with Covid-19, digitization has only accelerated; beyond the world of e-commerce and infotainment, and penetration to financial services in a large way.

This has paved the way for the exponential growth of FinTech in India to 87% in 2019 as compared to 52% in 2017 as per EY Global FinTech Adoption Index 2019. With the emergence of Fintech, the rise of a portfolio of personal loans increased by 38% until February 2021, but there is a slight fall in business loans. NBFC-Fintech has good performance in the finance market and the share in the business loan is 2.44%.

Use of Deep Tech

In such a scenario, FinTech lenders are adopting business and operational models powered by cutting-edge technologies such as big data, APIs and AI. These, seamlessly facilitate the creation of tailor-made and hyper-personalised products and services. A systemic cash infusion of technology provides and partnerships with financial institutions provide digital lenders with several advantages. It lowers the cost of expanding their customer base, reduces customer acquisition costs, and also offers services to existing customers such as de-risking the portfolio.

If Technology takes the forefront, it is possible to transform the lending value chain to enhance customer experience and increase efficiency, while simultaneously reducing costs of financial products and operating platforms. Through tech mechanisms lender can eliminate the traditional lending model. It can drastically bring down the turnaround time, to disburse loans in seconds. The digital lending scenario in India is still in a nascent phase, with monthly market size of ₹ 2000 crores, but is projected to grow to ₹ 7,500 crores by 2023-24. It expects that 22 million Indians will apply for new credit opportunities every month.

An amalgamation of digital payments and e-commerce post-lockdown has given a big boost to P2P Lending.

In a post-Covid world, P2P lending has strived to bridge the gap in credit between the formal and informal sectors. It was the local kiranawala, the chemist, the plumbers and the maids that served as corona warriors. They met the consumer needs and provided access to essential goods. Digital lending includes the underbanked in the financial fold by offering access to credit online, easily and safely at the last mile, and providing them avenues to be self-reliant.23

To cater to the underbanked sections of society, lenders have to look at alternative credit assessment modes to provide loans such as social media. Social Media platforms use AI and ML. Furthermore, AI-enabled chatbots with self-learning and self-correcting capabilities have helped lenders to fine-tune customer profiles. They can now offer personalised services to make customer-centricity a priority. Technology helps prevent loan defaulting and frauds by strengthening the underwriting process before a loan is disbursed. It also gives lenders a competitive edge over traditional models. This is due to the 24x7 availability of comparable loan rates, products and information on processing fees or other costs. Thus, it helps lenders reach their strategic goals and improve their bottom line.

With the penetration of the internet and smartphones, there is a burgeoning segment of aspirational Indians, largely from tier-1 and tier-2 cities who are exercising their purchasing parity to give rise to the boom of digital lending in the country. Realising the power of comparing product prices, e-commerce is giving rise to new-to-credit consumers. Additionally, instant loans make it a popular choice for medical emergencies or small-ticket loans like smartphones.

Summing Up!

There are exciting opportunities for fintech lending. These have the potential to change the scope of credit in the country. But, there are some challenges Regulatory hurdles, Asset quality management and Asset and liability matching to name a few which come in the way of achieving profitability. Access to formal credit also empowers informal borrowers with traditional models of finance in their entrepreneurial journey. Thus, it can serve as key drivers for the $5 trillion Indian Economy. An economically entitled and accredited population augments the bottom line of the nation. It also has a deep-rooted impact on the country’s socio-economic well-being.