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Digital Lending After Covid-19: Positive and Negative Implications

Ashish M. Shaji

| Updated: Jun 09, 2020 | Category: Digital Lending

Digital Lending

Digitalization and technological activities in the banking system have led to the creation of new financial technologies called fintech, which has helped establish a dynamic alternative credit ecosystem in the country. A new form of product and services like digital lending has allowed the customers to have access to their phones rather than doing frequent visits to the bank. It has opened up a broad scope of opportunity for a vast section of the population to access affordable credit. However, the outbreak of COVID-19 in the country has impacted various sectors adversely and challenged some of them, including the digital form of lending. While the impact of the pandemic has been adverse in some sectors, the altered dynamics provides new opportunity and challenge to specific sectors. Digitized lending is one of the sectors that come under it, which has been agile and responsive to changes. Due to this aspect, it is expected to take-off faster as compared to other sectors after Covid-19.

What is Digital Lending?

Digital lending is a process of providing loans that are applied, disbursed, and managed through digital channels. It is a process through which loans can be disbursed quickly through an electronic medium. There are a number of benefits attached to it that makes it preferable for customers. Some of the benefits include that it provides a convenient and faster way of disbursing loans when compared with the traditional method. The lending financial institutions rely more on algorithms and automated processes for approving and disbursing loans due to the maturing of the digital ecosystem and greater use of analytics.

How have the banks responded to the challenge of Covid-19 concerning digital lending?

The banks have been operating for fewer hours as most of the customers are not willing to visit bank branches due to the contagious aspect of the pandemic. For most of the banks in India, lending operations are not fully digital; therefore, this pandemic has served as a wake-up call to the banks whose digital operation is minimal. They have started to realize that digitized form of lending is the way forward and has digitized their process to develop contactless financing by working with some of the fintech players like bank bazaar etc. some of the banks have initiated COVID specific credit lines for lending digitally.

With the customers shut in their homes and banks operating for fewer hours due to COVID-19, the banks have got no other option but to switch to digital operations. They are now sanctioning loans online on the basis of uploaded documents. After the COVID-19 pandemic ends, contactless financing would be the new normal, and the banks are partnering with the fintech lenders who have a particular selling point, i.e., alternative sources of credit scoring. The credit activity is steadily moving to the digital landscape, and the banks have started putting in the hard yards to digitize in order to reach out to the customers.

How will COVID-19 impact digital lending adversely?

Digital lending is expected to witness an unprecedented increase in default rates, and the sector may be purged. Surging cases of unemployment and deductions in paychecks due to covid-19 may lead the digital lender’s providers to experience instances of bad loans and defaults. There has been a rise in the default rates with digital lenders complaining of unpaid dues, and it is expected that this rate may rise further. In the last few years, some of the digital lenders appeared to the scene owing to the concept of creditworthiness in return for high loan origination metrics on their investor decks. Such lenders are expected to take a toll due to loan defaults, and many may even vanish due to its adverse effect. This industry may experience a lot of consolidation, and lenders with stable principles will survive.

How is digital lending expected to emerge post Covid-19?

Digital lending is expected to emerge stronger and savoir post the pandemic. A few of the reputed lenders are expected to remain solvent and shall emerge out of the present crisis situation with resilience and improved risk assessment capabilities. There may be consolidation in the industry, and the majority of the small lenders might be absorbed by banks and more extensive financial technologies. Digital lenders are expected to update underwriting models, especially for unsecured loans, and the loan portfolios may start looking the same to that of the traditional lenders as they would factor risks aggressively. The present trend towards alternative data sources for underwriting may continue, and they shall be used in conjunction with traditional metrics like FICO scores etc.

Post covid-19 consumers will vary of splurging their money, and digital lending would gain pace with people’s disposable income being affected. There could be an increase in micro-credit. The microfinance lenders should be ready to address the need for credit while providing an affordable and convenient repayment to flatten the impact of the crisis. Digital disbursement would gain traction as microcredit provides ways to ease the cash crunch. Digitization of short term credit processes may facilitate the increase in the trend if repaid within the prescribed time limit. With the economy experiencing slowdown and credit expected to increase after covid-19, it might be more onerous for small merchants and consumers to accumulate loans. Notwithstanding, digital disbursement platforms with the principle of financial inclusivity would come up as the real winners. Through leveraging the right technology, these platforms would be able to ascertain the creditworthiness and facilitate financial inclusion.

For companies that will lend digitally, technology will act as a stimulus for innovation and risk mitigation, and it would be an essential priority for them.  By focussing on data science and analytics, the risk of fraud and delinquencies can be removed, and it will enable the consumers to drive forward through credit complexities due to the pandemic. It would be vital for fintech to ensure that they can provide services to the consumers as per their need once the pandemic subsides. Therefore the automated processes implementation for gaining insight into the eligibility and facilitating rapid processing would be the ultimate factor for their success. 

Why is digital lending preferred over the traditional form of lending?

Digitized form of disbursement of loans is more preferred over traditional mode of lending due to the following reasons:

Reason for Digital Lending over traditional lending
  • Consistency

It provides a consistent credit approval process to new and existing consumers. Offering a chance to apply for loans to existing and new members helps in boosting membership and loan growth.

  • Efficiency

It reduces overhead costs by 30-50% and saves time and revenue. It also provides a more significant opportunity for growth and improves the overall relationship between lenders and borrowers.

  • Quick disbursal

It takes less time for processing your loan application, which means one can expect quicker disbursal of their loans as compared to the traditional mode of lending. Quick disbursal saves a lot of time for borrowers who don’t have to wait for long and do frequent trips to bank branches.

  • Less Documentation

It involves less paperwork for grant of loans, unlike the traditional form of disbursement where you require filling bulk of forms for approval of the loan.

  • Suitable for first-time borrowers and people with fewer credit scores

It is an appropriate option for borrowers taking loans with no credit history. Traditional banks are reluctant to provide loans to first-time borrowers with no credit history because of the absence of evidence of your repayment history and creditworthiness. The Digital mode of lending can provide to those with low credit scores.

Conclusion

After the covid-19 era, there shall be a paradigm shift with regard to all aspects of lending, be it demand and supply of the credit or the enabling processes. The terrible crisis situation in the country has paved the way for the complete digitization of the financial institutions. Various digital lending models like P2P Lending (Peer to Peer) models are employed, which shows foresight and understanding of the situation and cope up with the innovative application of technology.

Also, read: All About Digital Lending and Its Business Models

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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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