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Innovative Digital Lending Models in India

Ashish M. Shaji

| Updated: Jun 27, 2020 | Category: Digital Lending

Digital Lending Models

In this era of digitalization, Digital lending has been growing like never before, and considering the times we are living in its only going upwards from here. Though it has been in its embryonic stage, it has managed to have a strong foothold in India. Different digital lending models are being used, and it is slowly becoming more sophisticated with the passage of time.

What is Digital Lending?

As the name itself suggests, digital lending is a process of sanctioning a loan digitally with minimal paperwork. The entire process from submission of loan application to the final disbursement of the loan is conducted electronically (internet). It has eliminated long hours of wait and a bunch of paperwork that was earlier required for getting a loan. It has simplified the process of getting a loan where the loan can be availed without even visiting bank branches.

Growth in Digital lending space and in the use of digital lending models

With enabling policy environment and advancement of technologies, digital lending has significantly caught up in India. It has redefined the rules of traditional banking in India, and its revolution has been led by fintech companies.

The main two reasons for the growth in the digital lending space can be attributed to the enabling policy of e-KYC (Know Your Customer) where a user can verify its demographic details and other details that are required to fulfill regulatory requirements. 

The other reason is the formalization and the acceptance of the Indian credit rating system. It has made it possible for fintech to rapidly onboard customers online without actually having them to fill a bunch of applications. When the customer is onboard, their creditworthiness can be evaluated, thus making the decision of approval or disapproval of the loan easy. 

Fintech start-ups have caused a massive transformation in the lending space through innovative and scalable lending models. The growth of digital lending has prodded traditional banks to redefine and adapt to their lending models with changing times.

Innovative Digital lending models

Induction of various business models of lending has made it possible for the lenders to meet the customer requirements and fulfil the regulatory requirements. It has helped in tackling the challenges posed by higher transaction costs, geography and transparency.

Some of the innovative Digital lending models are as follows:

Innovative Digital lending models
  • Peer to Peer (P2P) Lending

The P2P lending refers to a digital marketplace wherein an individual, or a company is connected with a lender. Here no middlemen or financial institutions are involved, which helps in quick and streamlined transactions. The parties mutually agree and fix a rate while a fee is charged by the marketplace platform, which may be a flat price or a part of the transaction amount.

 In this form of lending, money to borrowers or businesses is lent through online services which match lenders with borrowers. Often, Peer to Peer companies provides their services online and cheaply as compared to traditional financial institutions.

  • The bank-led digital lending models

This model is similar to digital marketplaces, where the lender is a bank and not an individual or a company. The banks charge interest on the loans that they provide depending upon their prevailing rates. Examples of this model include Kotak Mahindra Bank 811 application and HDFC bank’s 10-second personal loan. 

  • Invoice financing

This model applies to companies that are in search for working capital for their day to day operations. Such needs can be met by discounting the unpaid customer’s invoices. It can help them in meeting short-term liquidity shortage by accelerating trade receivables. Examples of this model include Indifi and KredX.

  • Loan market places

This platform helps in comparing loans from different banks and non-bank entities. With the help of specific algorithms, borrowers and lenders are matched. Examples of this model include Bank Bazaar, Paisa Bazaar etc.

  • Pay-later loans

These loans are digital credit products that allow “buy now and pay later policy”. The loan amount is credited to a customer instantly depending on their spending habits and repayment history. These loans have small ticket size with an interest-free repayment period after which a late fee is charged. Examples of this model include Amazon pay, Bajaj Finserv etc.

  • Line of credit

The line of credit is a form of account that helps the borrowers to draw and repay the available funds. The average rate of interest revolves between 15 to 17%. Examples of this model include MoneyTap.

  • SME Lending

SME stands for Small and Medium Enterprises. In SME lending loans are provided for small businesses. It helps the small businesses to meet their requirements during the course of their business. These requirements may include launching a new product, shifting to a new place, hiring new employees etc. Examples of this model include Farmart, Flexiloans etc.

Road ahead for Digital lending in India

Increase in adoption of digital lending models and the continuous rise of technology brings us to the fact that the prospect of digital lending is set to scale new heights in India. The urban areas of this country have got a taste of it and have easy access to it, but a majority of the rural areas still lack penetration.

The road ahead for digital lending looks promising, but there are certain areas left to be penetrated. Therefore digital lending in India can be a source of help for people in need, and it is expected to cause major transformation in the lending business in India.

Conclusion

Digital lending is complex and constantly shifting, which makes strict categorization tough, but the innovators have continued to test, refine and develop their digital lending models based on the customer need and market experiences.

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

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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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