The demand for digital lending platform solutions is growing rapidly in India, and digital lending is one of the fastest-growing fintech segments in the country.
India’s burgeoning digital lending market is expected to hit $1.3 trillion by 2030, growing more than four times in value from $270 billion currently, according to a report by Inc42, a technology information platform. This business is mainly covered by fintech startups and non-banking financial companies (NBFCs).
The annual consumer study – How India Borrows (HIB) 2022 – by Home Credit India, a local arm of the global consumer finance provider, concludes that more than 50% of the borrowers surveyed show preference and acceptability for EMI Cards when it comes to shopping or for any credit need. Overall, more than three-fourth of the borrowers led by Tier 1 and 2 cities, and Gen Z/millennials are optimistic and buoyant about digital lending services, owing to rising popularity of online loans, convenience experienced, and faster adoption of digital lending.
According to a recent study by neobanking platform Freo, in 2022, millennials continue to constitute a majority when it comes to availing of lending products, contributing to 44% of the total transactions. The share of smaller loan ticket sizes has also increased compared to the previous years by 10% in terms of volume.
When it comes to credit, over 33% of total transactions came from the age group of 18-25, the study revealed. This is a strong indication of the fact that millennials are not afraid to take loans to meet their short term and long term goals, noted the study.
The insights were gathered by analysing transactions on Freo’s platforms for the year 2021- 2022.
“Each generation has its own favourite way to spend; however, our survey shows that millennials are truly redefining both the lending and payments categories in India. Being digital natives, they are always at ease with innovations, are avid users of mobile applications, and prefer getting things done from the comfort of their home. One of our key observations has been the shift in mindset and growing comfort towards availing digital credit and using digital payments to achieve both short term and long term goals,” Anuj Kacker, Co-Founder, Freo, said in a company statement.
As per a 2022 PWC report, the digital lending market in India will have a growth rate of 48% by 2023.
“Automations in lending and collection processes are definitely helping the industry grow faster and we can all assume that we will be seeing more of this in the next few years for sure,” says Aarav Singh Bhatia – Member at Fintech Association for Consumer Empowerment (FACE) and Co-Founder at Pocketly, a moneylending platform.
Short term loans of a small ticket size seem to have found a preference among the consumers, and how the current players keep innovating this in light of the new digital lending guidelines would also form the new trend, he adds.
Increased use of alternative data is another trend that is being witnessed in the digital lending industry.
“Lenders are assessing borrowers’ creditworthiness using non-traditional data sources such as social media profiles, mobile phone usage, and other digital footprints,” says Nageen Kommu, Founder & CEO, Digitap, a fintech platform.
Also, frameworks such as Account Aggregator (AA) and Open Credit Enablement Network (OCEN) are essential tools helping in digital loan decisioning, says Prabhtej Singh Bhatia, Co-Founder, Falcon, an embedded finance startup.
“ Additionally, Buy Now, Pay Later (BNPL) and Save Now Pay Later (SNPL) are now dominating the consumer loan industry, allowing customers to access credit at the time of purchase. This is why digital lending fintech companies saw the highest inflow of funding – $902 million across 28 deals in Q2 2022. It accounted for 50.6% of the funding inflow in the fintech sector and 33% of the funding deals during the quarter,” says Bhatia.
Meanwhile, the new rules of digital lending will make the entire process of borrowing more transparent, trustworthy, and inclusive for borrowers, opine industry experts.
“With these rules, multiple decision flows can be configured for different customer personas. At the same time, varied data attributes, including alternate data, can be easily consumed for comprehensive decisions by the lender. It makes it easier to define decision flows especially for the New-To-Credit segment thus enabling their financial inclusion,” states Sandeep Mathur, Chief Revenue Officer, Lentra, an embedded AI-based finance startup.
For Aarav, the new digital lending guidelines issued by RBI is a solid attempt by the regulator to bring more transparency in favour of the borrower in the industry.
“It will definitely lead to weeding out those lenders who don’t follow ethical practices in their business,” he explains.
Bhatia believes these regulations will prevent misuse of customer data, misselling, frauds, harassment and inflated interest rates for the borrower.
The new digital lending rules also ensure compliance by incorporating lender’s and regulatory policy guidelines.
“They enable embedding machine learning models to enhance decision criteria and ensure a quick go-to-market (GTM). The capability to build, test and deploy these rules quickly extends more power, flexibility and agility to lender,” mentions Mathur.
While digital lending has evolved over the last ten years and the pandemic has only accelerated the need for an accessible lending system for both lenders and borrowers, one of the barriers in digital lending can be assessing the credit history of a borrower correctly.
“Digital lending aims at bridging the gap that exists due to traditional lending being an inaccessible financial resource for all potential borrowers, so finding the right balance between making financial assistance available to all while keeping the non performing assets (NPAs) low is the major challenge,” says Aarav.
Another challenge before the digital lending landscape is risk management and access to limited data and resources in order to assess and manage credit and operational risk and fraud.
“Therefore the associated players, including banks, NBFCs, financial institutions need to develop new risk management processes and systems to handle the unique challenges of digital lending,” says Mathur, adding that a need of the hour is deploying competent systems that will strengthen security of confidential data and information exchanged between customers and regulated entities.
According to Kommu, a major barrier is clarity on regulations. “Although RBI has been taking the digital lending space seriously with the release of Digital Lending Guidelines, there are areas in this space that are prevalent as a market practice but the regulator has not clarified if those are permissible as per their overall regulations. We expect this to be a step-
by-step process from the RBI’s end.”
Apart from that, a major issue in the digital lending ecosystem is also the availability of structured data, he adds.
Explaining how Application Programming Interface (API) platforms have reformed the digital payments landscape in India, Aarav states that these platforms have helped a lot in the traditional payments and lending space in terms of automating the processes of Know Your Customers (KYCs) and documentations.
“However for pure technology driven digital lenders, adoption or use of public APIs is a supplemental resource,” he says.
Aarav also feels that alternative lending operations could be attractive investment possibilities for large-scale investors in 2023. “India is such a market where new financial investment opportunities keep coming up everyday, the success of peer-to-peer (P2P) lending model is one such proof that alternative lending operations are attractive investment opportunities. ”
While most banks are digitising parts of their business and operations, many are dissatisfied with progress, especially in credit.
“A concern shared by me and supposedly my peers, would be ensuring the stability of the loan book being built. While digitising operations, it is very important to make sure the stability and integrity of the credit markets (and wider financial systems) stays intact,” states Aarav.
Digitising back office operations and middle office operations is good for productivity and cost savings. However, it does not enable reach, mentions Bhatia.
“Reaching and engaging the customer (borrower) needs robust technology, user friendly UI/UX experience and hyper personalisation which banks are unable to provide. This is similar to Unified Payments Interface (UPI) where banks were the first to be certified but the market moved towards platforms such as GooglePay, Paytm, PhonePe, which provided a much easier experience and lower failure rates.”
Bhatia also states that a major frustration stems from the fact that banks have large distribution franchises, which they are unable to utilise to the best of their ability given growing digitisation; so cost structures need to change drastically.
For Aarav, anytime there is a shift in the way businesses operate, the business will not be a stranger to the wide array of obstacles it may face in adopting a new normal.
“The real result will be observed in how the banks overcome those tensions, it may be by investing more in technology and related infrastructure or it may be by partnering with digital lending experts in the market,” he adds.
However, Aarav believes that the next decade of digital lending should see enormous growth.
While Bhatia thinks that with the unified underwriting policies being proposed by banks (e.g a customer who is eligible for home loan automatically becomes eligible for car loans, credit cards etc.), this industry is expected to see a sharp spike in growth in 2023 and touch $1.3 trillion by 2030.