Are Digital Loans The Future Of Lending?

With improved online infrastructure and limitless expansion of internet services, it is expected that the total value of the digital lending business in the country will exceed $5 trillion, by growing 5x in the next 5 years. What is the reason behind this exponential augmentation in size? Inter-alia, use of advanced technologies and initiatives by FinTech players will have a tremendous role in increasing the availability of financial products and services to the bottom of the pyramid segment, who have otherwise been largely devoid of basic banking, credit and other financial services. 

Enabling first-time credit access to masses

Banks and NBFCs typically target super-prime and prime customers with credit scores above 700, thus widening the gap between the haves and have-nots of the credit arena. As a result, only 10% of small businesses currently have access to formal credit, thus remaining credit-deficient and underserved by big brick-and-mortar investors. 

While the near-prime and subprime borrowers were traditionally financed mainly through informal channels only at an exorbitantly high rate of the capital of 30% or more, P2P lending is catering a large segment of the unbanked and underbanked population. By serving to the low-ticket size, short-term needs of individuals, P2P investors are elevating the barriers to equitable and inclusive credit growth and taking India closer to heightened financial inclusion in coming years.

Potential Market Size

In FY17–18, total lending and deposits grew at a compound annual growth rate (CAGR) of 10.94% and 11.66% respectively. The fastest-growing segment in the emerging markets is the retail credit market, which is the fourth largest. It accelerated to USD 281 billion from USD 181 billion between December 2014 and December 2017. 

Through digital channels, the number of transactions is more than doubled from 6.2 billion in FY16 to 13 billion in 2 years until FY18, indicating a digital disruption in both traditional and modern channels of finance. The FinTech lending market is forecasted to exhibit accelerated progress between 2019 and 2025 owing to factors such as growing internet and smartphone penetration, the thrust from digitisation and regulatory reforms. India’s digital lending market will see a CAGR of 36% by 2023. 

End-to-end digital lending now a reality

Digital lending has significant advantages over traditional lending, with the potential to address prevalent credit-related challenges in India. One of the most distinguishable advantage of digital lending is speedier approval of credit. Credit assessments and loan disbursals on digital lending platforms have visibly quicker turnaround time than traditional loans – particularly for small-ticket credits and advances, which are most common among new-to-credit borrowers. 

Some of the factors why the disbursal turnaround time is significantly lower in digital lending are replacement of paperwork by digital data captures, automated evaluations leveraging on technologies like advanced analytics, artificial intelligence (AI) and machine learning (ML) and no or little in-person visits. 50% of the loan seekers with internet access buy online, the key factor being purely digital and no physical element involved at any stage of the customer relationship.

 Is “Digital” the new normal?

With the current Covid-19 pandemic, there has been a drastic behavioural change in the way people do daily transactions. Health will be a priority for everyone and India is getting ready to ride the digital lending boom. This point is validated by the fact that while ATM and physical branches faced a negative growth in transactions by 5% and 8% respectively, transactions through Digital Lending channels were growing at a huge 21% in 2017-18. In 2017, India held the largest share of Asia’s alternative lending deal count at 41% as compared to just 7% in 2014, denoting a progressive growth in online lending of funds. To ensure that the digital lending model remains sustainable in future, it would be essential for FinTech investors and incumbent financial institutions to develop sustainable, secure and scalable technology platforms.

References: BCG Digital Lending Report; PWC Report-A wider circle

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