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In the past few years, Digital form of lending has been a growing global phenomenon. The global market size of the digital lending platforms may grow from 5.1 billion dollars to 12.1 billion dollars in the next few years. The increase in consumer demands and expectations have formed new markets for alternate ways of borrowing money and the businesses have wasted no time in understanding the importance of customer experience as a differentiating factor. They are now in continuous pursuit to drive efficiencies, cut down on costs, and expand.
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Simply speaking, Digital lending is a process of quick loan disbursal through electronic medium. It is considered as the most effective, convenient, and faster way to disburse loans as compared to the traditional method. With the maturing of the digital ecosystem and enhanced use of analytics, automation, and blockchain the lending financial institutions rely more on algorithms and automated processes for loan approvals and disbursals.
There has been a definite shift from the traditional mode of lending to digital lending in the recent past. It is attributable to the fact that the digital mode of lending offers many benefits that may not be found in traditional mode.
These benefits of digital lending are discussed below:
One of the essential benefits of digitization is that you can have access to loans easily and without doing multiple rounds of the bank. You can apply for a loan anytime and at any place. It brings convenience to the borrower that’s why it has been widely accepted.
It is a process that possesses efficiency in its work that means it is swift in disbursing the loan to a borrower.
Another advantage of this mode of lending is that it requires less paperwork for grant of loans and people can apply for the loan without filing the bulk of forms as in the case of banks.
Traditional lenders may be reluctant to grant loans to persons having no history of taking loans as they don’t have proof regarding their loan repayment habits but in case of digital mode of lending one can easily get a loan even if the borrower is borrowing for the first time.
There has been a variety of business models that have been introduced to meet customer requirements and regulatory needs. It has led to tackling the challenges posed by the geography, higher transaction costs, and transparency.
The digital lending business models are of following types:
This platform helps a consumer to compare loans available from different banks and non-bank entities. Here specific algorithms are used to match the borrowers and lenders. Some of the examples of Loan market places include Bank Bazaar, Paisa Bazaar etc.
In this case end to end, digitized lending products are offered through mobile or web-based platforms. The whole process of lending is digital from customer acquisition to loan distribution.
Peer to peer lending also known as P2P lending is the method of lending money to borrowers or businesses via online services that match lenders with borrowers. It uses profiles and data to match borrowers with lenders. Peer to peer companies usually offer their services online and facilitate their services cheaply as compared to conventional financial institutions. Some of the examples include Faircent, i2ifunding etc.
The NBFC’s who lend directly tie-up with wholesale participants and marketplaces with a view to target a huge number of merchants who source their products there.
The line of credit is a revolving account that allows the borrowers to draw and repay from the funds available. Example- MoneyTap. The average rate of interest is charged between 15 to 17%. The minimum tenure of a line of credit is two months and goes up till 36 months.
The Small Medium Enterprises loans are loans that are for small businesses. It is useful in fulfilling the requirements encountered by small businesses during their course of business. These requirements include new product launch, moving to a new place, hiring new employees, marketing, etc. some of the examples of this form of digital lending business model are Farmart, Flexiloans etc.
It is a short term working capital facility provided by the lenders for Micro, Small, and Medium Enterprises based on the unpaid customer invoices. It is used to meet the short term liquidity needs of Micro, Small, and Medium Enterprises allowing them to accelerate their accounts receivables.
It involves a broad credit scoring mechanism where it uses technology to analyze various factors such as payment history, spending habits of a borrower, etc.
As we enter into the domain of digital lending, lenders who will be able to cater to the needs of varying customer expectations and changing market conditions would be the ones who shall beat their competitor. Additionally, Digital lending is expected to be the new normal going forward which means more opportunity for customers and lenders.
Also, read: Advancement of Digital Lending in India
Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.
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