What are the factors responsible for the growth of Digital Lending?

Ashish M. Shaji

10 Sep, 2022

In India, the advent of digitalization has caused a tremendous change in the lending system. Digital lending has made the process of lending and borrowing simplified. A number of factors have fuelled the growth of Digital Lending in India. This article seeks to throw light on such factors, but before that, let’s have a brief understanding of digital lending.

What is Digital Lending?

Digital lending is the process of granting loans to a borrower electronically. It helps in providing loans with greater simplicity, transparency, and efficiency. It involves the use of online technology to originate and renew loans that help in making faster and informed decisions.

What is the need for Digital lending?

The need for digital lending can be deduced by the fact that the traditional model of lending involved lengthy procedure which consumed a lot of time and caused stress to the consumers. Therefore the need for a form of lending that provides an ease to the borrowers to avail any kind of loan was emphasized.

Higher loan origination costs, longer turnaround time were some of the factors that caused the introduction of the digitized mode of lending.

The traditional mode of lending involved long hours of wait, cumbersome paperwork, and limited options for borrowers. All these have been eliminated with the coming up of the new form of lending.

Factors responsible for the growth of Digital Lending

There have been numerous factors that have caused the growth of digital lending in India. Some of them are mentioned below.

• Technology

Studies from recent decades have emphasized the fact that the most successful business models involve customer empowerment. With the modernization of technology, there are tools that can perform various functions like document verification, background checks, loan disbursal, etc., thereby eradicating the need for approval from authorities and making the customer in charge of the whole procedure. The technology is continuously being upgraded, so the process is also becoming more efficient and faster. 

• Cost Reduction

As you know, the involvement of fewer people means more saving of money. In the process of digital lending, virtually no one is involved. Most of the manual work is done by technology, and the process is also paperless.

• Security

When it comes to borrowing money, you require giving your personal details such as account details, personal ID to the lender, which could concern you due to the prevalence of identity theft, money theft, etc. With digital lending, enhanced security software is used, which secures your information and protects it from hackers.

• Increased focus in customer experience

Another essential factor responsible for the growth of digital lending is the emphasis on providing a better customer experience. With the increase in the digital economy, lenders have also realized that how much they need the customers is more than how much customers need them. This has led the lenders to focus more on customer interests and improving their experience than in the past. 

• Disbursal Time

Reduced disbursal time with digital lending has caused a number of people to prefer this mode of lending instead of traditional mode. Earlier, the loan disbursal time would take a number of days, but now the same loan is disbursed in a matter of a few hours. Considering its swiftness, more people have adopted it.

• Smooth and hassle-free process

The traditional form of lending caused a lot of pain to the borrowers as they require making frequent trips to bank branches for applying for the loan and to trace its progress. The processing of loans was a time-consuming process, but the digital lending platform has made the entire process smooth and hassle-free. It is convenient for the borrowers that they can apply and trace the process of loan from the comfort of their homes without physically visiting the bank branches. 

• Introduction of e-KYC

The induction of e-KYC (Know Your Customer) has been a significant factor in the rise of digital lending. With e-KYC, banks can verify the borrower’s adhaar credentials and verify their identity and other details.

Most of the banks provide internet banking and mobile banking to its customers through which the customers can access their financial history and showcase their ability to repay the loan effectively. 

• Government Initiatives

Various initiatives of the government have fuelled the growth of digital lending in India. In the last few years, a considerable amount of money has been allocated for digital India initiatives.

Fintech and Peer to Peer lending was part of that plan, which may play a vital role in transforming India into a digital economy. Further support of the government can ensure that Digital lending gains more importance. 

The above-mentioned factors continue to play a significant role in the growth of digital lending in India.

The road ahead for Digital Lending

With more and more people coming under the ambit of technology, the prospect of digital lending looks bright, and it should continue to grow wings. Majority of the people in the urban areas have access to this mode of lending, but the rural areas or the socially backward areas in India still lack penetration.

The idea and goal going forward must be to penetrate the rural areas where people are unaware of technological transformation, thereby providing them the opportunity to access the simple and effective method of loan disbursal.

Conclusion

Also, read: Digital Lending After Covid-19: Positive and Negative Implications