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Future of Digital Lending in the Indian Market

Ashish M. Shaji

| Updated: Sep 17, 2020 | Category: Digital Lending

Digital Lending

Digital Lending is steadily making a mark in India. It could be the next big revolution in India. In this article, we will explore the prospect of this mode of lending and look at the factors driving its growth. Let’s first have a basic idea about it.

What is Digital Lending?

It is a process through which quick loan disbursals could be achieved via an electronic medium. It is considered one of the most effective, convenient, and faster ways to disburse loans in comparison to the conventional methods.

With the maturing of the digital ecosystem and the use of analytics, automation, and blockchain, the lending financial institutions count more on algorithms and automated processes for approval and disbursal of loans.

A shift from Traditional Lending to Digital Lending

Lending has been a give and take transaction traditionally, where the lender provides some money to the borrower in return for some profit on the money. Earlier, this sector used to be highly unorganized.

However, it has evolved from pawnbrokers lending money by taking collateral to be a more structured process involving banks and financial institutions. With the advancement of technological innovations like Fintech, lending has gone through a sea of change, and it has turned digital. 

Lending from banks and their limitations

The banking industry is a vital cog of the financial system for providing deposit and lending services. Banks involve huge compliance requirements for which they have not gone beyond a level with respect to innovations in customer products and services.

Banks are also risk-averse by nature as they are inherited custodians of public money, and the customers have to go through a lot of manual processes while transacting through banks. Financial inclusion and banking services to marginalized sections of the society are yet to be achieved in Indian banking.

There are limitations while lending from banks. When a person goes to a bank for a loan, a lot of paperwork is still required, and in some cases, loans are not available for small consumers. In today’s world, customers want everything to be done with just a click, and lending apps are doing just that.

Why Fintech are preferred more instead of banks in the digital lending landscape?

App-based loans are preferred more due to seamless customer experience. Consumers may require paying more convenience fees, but these apps have been meeting the immediate demands of people for funds in a quick and hassle free way.

According to a joint study by Omidyar Network and Boston Consulting Group, the digital mode of lending is set to grow to 100 billion dollars by 2023 in India. The government and the Reserve Bank of India[1] are encouraging digital payment with a view to boost digitized mode of lending in India. AI-based lending evaluates the creditworthiness of applicants by compiling information by social media activities and consumer behavior on other platforms.

All traditional mode of lending is affected due to the present pandemic related crisis. However, there is no such limitation in case of new-age technology and services. The borrowing process has been simplified, and it has become paperless with this mode of lending. With the further advancement of technology, digital mode of lending has a vast scope and market in this country to make progress.

Growth of digital lending tech start-ups in India

Digital lenders are deploying technology to enhance customer experience and function more effectively. They use AI and Machine Learning to improve the acquisition of customers and reduce costs. The inclusion of alternative data for credit underwriting and adopting complex risk management solutions have caused major improvement in lending activities.

Digital lenders are growing like never before and with a steady infusion of investment, on a global level, and in India. This speaks volumes of their potential.

What are the factors that can drive the future of Digital lending in the Indian market?

The following factors can be the force that drives its future in India:

Digital Lending
  • Digital Natives

The fact that India has a young population and that too internet savvy, youth constituting most of them, this paves the way for an increase in customers. People want quick service with convenience, and the traditional method of lending lacks that aspect.

  • Rise in innovative lending models

Customer centric operating models have provided a boost to the digitized lending space. Increased adoption of such models by fintechs can help in maintaining the growth in digitized lending across the globe.

  • Supportive regulatory environment

A supportive regulatory environment is critical to success. Financial regulators are required to come up with policies and procedures that are favorable to this mode of lending. Many developed economies have created sandboxes to support and speed up innovations in the sector. 

  • Security

Security is another factor that, if assured, can take the digitized mode of lending forward. Lending and online loan providing platforms must initiate campaigns and awareness sessions to educate customers regarding cyber frauds. With a fair and proactive approach by digital lenders, this lending space would become safer and thereby facilitate its growth in India.

Digital Lending is the Future

Digital lender offers services on every device, and to use its services, one can download its application on their device. They offer great flexibility to their users, including multiple different routes to get funding, and are lenient in terms of documentation.

End to end automation means that there is less work to do learning new systems. One can also usually fill an application form that provides them a totally personalized funding decision, and when a business requires funding, this can be a lifesaver. Many credit card processors are now providing financing through digital lending platforms from their websites itself. It makes it easy for all merchants who are using their services.

This form of lending also opens up access to funding for businesses that would not have secured financing the traditional way. For many industries, bank loans were difficult to come by. As digital platforms are more efficient and good at identifying risk than conventional methods, many business owners can get financing that they would never have otherwise.

The Covid-19 pandemic has changed the way people do a lot of their work. It has accelerated the adoption of digitization across the country. With reports of an increase in digital payments, it is safe to say that digital mode of lending may also witness a boost, if not during the pandemic, then surely after the pandemic. So this way also its future looks very promising, and it is safe to say that this mode of lending is the future.

Conclusion


Although India may be in an embryonic stage when it comes to the development of digital lending, its potential is huge, and with the support it is receiving, it may soon come close to its western counterparts.

Read our article:Cybersecurity in Digital Banking: Threats, Challenges and Solution

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Ashish M. Shaji

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 criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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