Digital Lending

Overview

Over the past few years, the Indian Financial Industry has seen several drastic changes. Amongst all, the concept of Digital lending has been a critical phenomenon bringing drastic economic changes evolving the credit access to the common masses rather than restricting it to certain businesses or certain population segments. Not only has credit access been democratized but also brought inclusion, efficiency, and speed into the process of lending. Read further to know what digital lending is, its purpose, its types, its challenges, how it differs from traditional lending, and more.

What is Digital Lending?

Digital lending can be understood as a process of offering, application, disbursal, and management of seamless credit access to borrowers through e-platforms. Technological advancements have done away with the need for face-to-face interaction and lengthy manual paperwork. Such lending platforms employ technology to automate the entire lending cycle starting from receipt of a loan request to verification, disbursement, and finally repayment in a quick, simple, and faster manner ensuring a rich experience for the borrowers.

Digital lending in India has witnessed immense popularity, especially among the younger masses, who benefit from its flexible approach and convenience. Further, the widespread accessibility of smart gadgets and growing access to credit facilities customized according to diverse customer requirements like business loans, consumer durable loans, personal loans, etc., has worked in its favor.

However, banks, NBFCs, or fintech businesses extending credit facilities to borrowers online need to comply with the RBI Digital Lending Guidelines. Lenders and digital platforms must fulfill compliance ensuring customer data and privacy protection, data reporting, and due diligence.

How does Digital Lending work?

The procedure of offering credit facilities to consumers online is a simple and effective process. Any user who wishes to avail of credit products needs to register himself or the business entity (in case of business loans), then choose the suitable loan facility, fill out the form, and attach mandatory documents. After due verification, the application is accepted/rejected and the amount is disbursed directly to the provided bank account of the borrower. Therefore, Digital lending has benefited its customers, from individuals to businesses with a variety of customized loan products in a stress-free and quick manner.

Growth of Digital Lending in India

Being one of the largest populous countries in the world with rising access to smartphones and the internet, growing demand for credit facilities, budding start-up ecosystem, and cutting-edge technologies the Indian digital lending industry has reached new heights projected to reach $515B by 2030. This growth has been further amplified through the Buy Now Pay Later facility, P2P lending and Co-lending facilities, etc. bringing drastic changes in the industry. Other key features attributed to the growth of Digital lending in India –

Faster Application Processing and Approvals –

Digital lending platforms have automated processes leading to shorter and more effective application processes and approval with the help of advanced algorithms for assessment of their creditworthiness.

Extending Credit Access –

Typically, traditional lenders have to comply with stricter regulations with harsh eligibility criteria for application acceptance which certainly disheartens borrowers whereas digital lending platforms adopt a flexible approach to extend credit to a wide range of borrowers, including entrepreneurs and SME business entities in underserved areas.

User-Friendly Interface –

Most digital platforms in India are easily accessible on smart devices with user-friendly interfaces bringing more ease and convenience for the customers to make loan applications, view application updates, or receive funds into their accounts after approval without any hassle.

Types of Digital Lending

Digital lending has come a long way from a simple bank opening to making full fledged transactions. Individuals and corporations can lend and borrow online with a few simple clicks and manage their finances. Be it personal loans, microloans, business loans, mortgage loans or student loans, the purview of digital lending is all encompassing. Below, a look at the major types of lending:

Peer-to-Peer (P2P) Lending –

P2P lending platforms facilitate connections between borrowers and lenders, facilitating credit facilities on mutual agreement at flexible rates of interest for borrowers and leading to higher returns for lenders.

Direct Lending –

Digital lending takes place through the lending applications available on the Internet which primarily act as an intermediary between the lender and borrowers. Thus, an applicant borrower can access the platform and make an application to the lender institution in a matter of minutes.

Marketplace Lending –

There are various online platforms that permit various lenders to cater to a variety of borrowers with several loan products by assessing them on the basis of factors such as credit history, track record for repayment, loan purpose, etc.

Digital Microfinance –

Similarly, certain digital lending platforms cater to audiences from low-income groups or business entities normally rejected by traditional lenders for failing to meet certain eligibility norms. Such e-microfinance platforms assess customer eligibility based on alternate data sources rather than just sticking to credit history.

How is Digital Lending Different from Traditional Lending?

Characteristics	Traditional lending	Digital Lending
Application procedure	Under the traditional lending process, the borrower needs to fill out forms and prepare dozens of paperwork manually. Borrowers have to personally visit the lender’s branch to request loans, submit documents, and verify credit scores.	In the case of digital lending, the complete process is streamlined and does not require any manual paperwork. The application process can be completed within minutes at any time from anywhere in the world. Not only this but the process of credit history evaluation and form verification is completed digitally.
Accessibility	Traditional lending encompasses services restricted to certain geographical areas and operating through physical branches. Applicant may be allowed to visit the office branch/concerned loan officer only during business hours only.	Digital lending platforms afford ease and convenience to borrowers to apply from anywhere in the world.
Process of Authentication	Traditional lending necessitates the completion of paperwork to start the process manually and may even require you to personally visit the lender’s office which may enhance the loan duration.	Digital lending platforms enable application processing, document submission, verification, and disbursal of loans completely online faster.
Credit Assessment	Traditional lenders usually evaluate credit history, assets, financial metrics, etc. to determine whether the borrower applicant meets the criteria for eligibility for lending.	Digital lending platforms employ innovative technology to evaluate the repayment ability of a customer on the basis of alternative data sources like digital activity and social media, etc. extending credit facilities to people unable to access funds through traditional lenders.
Customer Experience	Traditional lending may or may not offer a seamless customer experience depending upon the borrower’s eligibility criteria.	Digital lending provides a seamless and rich user experience including self-service selections, custom-made loan offers, and round-the-clock customer support.
Risk Management	Traditional lending depends on conventional risk assessment structures which may be deeply rooted in its conservative practices lowering chances for certain borrowers to make loan applications.	Digital lending platforms generally adopt a flexible approach towards considering eligibility for an application.

Digital Lending Benefits

Encouraging Financial Inclusion –

The greatest advantage of digital lending is that it has democratized access to credit across the nation, including the underserved strata of population rejected by traditional lenders. Digital lending platforms go beyond assessing credit history and consider applicants on the basis of alternative data sources.

Affords Speed and Convenience –

Streamlined processes for application to disbursal of loans reduce the total time by almost fifty percent which has been a game changer for the financial industry. With advanced algorithms to assess customer data quickly at the convenience of place, helping digital lenders to access funds in case of emergencies is much appreciated in the competitive world whereas delay in reaching decisions may discourage customers from looking for alternative options.

24-hour Availability –

Digital lending platforms are available and can be accessed anytime or from anywhere in the world at the convenience of the borrower.

Improved Risk Assessment –

Unlike traditional lenders who primarily accept or reject loan applications on the basis of the credit history of the applicant. However, digital platforms employ cutting-edge algorithms to analyze a broader criterion for applicants which is a more precise manner of risk assessment. Such an approach decreases the probability of fraud or defaults. Furthermore, data monitoring and examination of any inconsistencies periodically alleviate potential risks.

No need for Collateral related conditions –

Unlike traditional lenders, digital lenders have no necessary conditions for collateral which comes across as a hurdle for individuals or businesses (like SMEs). To know more about SME loans read here.

Scalability and Flexibility –

Cloud-based infrastructure enables unified integration and personalization for lenders to become familiar with changing market demands and offer loan products to customers accordingly. Digital payment data allows lenders to offer credit-based loan products like Buy Now Pay Later (BNPL) or EMIs which are rapidly replacing traditional offline transactions and efficiently underwrite loans by using customers’ financial and transactional data on an API-driven approach, fintech companies can significantly reduce the time required to obtain a loan.

Catering to an Underserved Population Segment –

Traditional lending institutions count on the credit history of the applicant to assess his/her creditworthiness whereas the digital lenders evaluate their applicants on broader metrics based on alternative data sources like their social media activity, etc., and propose better loan products enabling them to a broader customer segment including financially weaker individuals or smaller businesses.

Personalized Loan Products for Customers –

Digital lenders offer a wide range of loan products for individuals as well as business needs in a simple and faster manner. Further, it also helps lenders to receive customer input data which helps lenders to develop a better understanding of their requirements and design products accordingly.  Hence, it helps the lenders to hyper-personalize loan products as customized for individuals and SME businesses.

Consistent Processes –

Digital lending platforms have a consistent credit approval process from receipt of application to regular interactions which instill trust and loyalty among the customers. Applicants obviously desire to engage with lenders offering a hassle-free lending process which empowers lenders to attract and retain customers for longer duration.

Enables Economic Growth –

Digital lending supports economic growth by enabling easier credit access to individuals and businesses which in turn leads to more employment opportunities and a rise in the living standard. Extending necessary financial resources to small scale business units across countries through working capital, term loans to ensure business growth, purchasing machinery, etc.

Digital Lending Challenges

Although there are several benefits to avail digital lending products and services in India, there are certain challenges to it. Some of which have been provided below-

Cyber Security and Fraud Risk –

Digital lending platforms are prone to cyber fraud and cyber-attacks posing a risk to consumer data. Accordingly, lenders need to adopt robust technology to ensure customer data protection against fraudulent applications.

Metrics for Risk Assessment –

Digital lending platforms assess the creditworthiness of the borrowers through data sources such as social media and mobile data which may or may not be reliable in comparison to the credit history of the applicant which poses a challenge for lenders. Thus, digital lenders should enable sophisticated risk identification mechanisms to prevent such defaults.

Stiff Competition –

Apart from all these, new digital lenders face stiff competition from established traditional lenders like Banks and NBFCs who are building digital lending platforms in India for which they need to provide distinguished products or services for ultimate customer benefit.

Lack of Financial Knowledge and Awareness –

There is a significant population segment that is still unaware of the presence of functioning digital lending platforms or their benefits. Thus, it is imperative to spread information regarding its risks and benefits to avail of loan facilities.

Regulatory Challenges –

The digital lending industry in India is in a state of under development with a lack of inclusive regulations for lenders as well as customers. Currently, all lenders offering lending services online should fulfill their obligations under the RBI guidelines and such other notified guidelines.

Conclusion

As a result, digital lending has democratized credit access across all client categories, all income groups and sizes of business while making a substantial contribution to economic growth through financial inclusion. It has truly transformed accessibility to financial resources at the convenience of the applicant with flexible repayment terms and application processes.

Employing technologies like AI, big data, and blockchain, fintech businesses are offering lending solutions bringing more efficiency and convenience to credit facilities for their customers. Thus, despite certain challenges such as cyber-security and regulations, digital lenders are coming up with innovative products and services to better serve the customers and acquire more market share in the lending space till now dominated by traditional financial institutions.