Digital Lending: A bridge towards financial inclusion

October 21, 2021 1:40 PM

Digital lending is the process of availing credit online. Its increased popularity amongst new-age lenders can be attributed to expanding smartphone penetration, credit range flexibility, and speedy online transactions.

Digital lending is mostly preferred by those who are generally not able to avail any credit through the formal sources of finance, like banks.

Digital lending is a powerful tool that can be used for financial inclusion. With new innovations underway, digital lending has enabled many Financial Service Providers a way to offer much better products to the masses at a much faster rate which is even more cost-efficient. Digital lending can prove to be a tool acting towards the growth of higher quality of financial services to underserved businesses and people.

India has a huge growth potential when it comes to the Digital Lending landscape. Financial Inclusion has been one of the primary goals the Government of India wants to achieve through their new initiatives. Looking at the data it can be seen that the Indian Household debt only stood at 11% as of 2017-18, whereas in China and the USA it was 49% and 78%, respectively, which shows that there remains a huge underutilised potential for digital lending in the country. This could only be achieved by getting the tools aimed at increasing financial inclusion to the general public.

What is Digital Lending?

It is believed by many that FinTech is one of the major forces that could clear the roadblock of low financial inclusion. The Banking, Financial Services and Insurance sector have gained major traction in the last few years and have revolutionized the loan procurement and disbursal system through FinTech. The growth of digital lending has been phenomenal and this growth has driven digital lending as well. A 2016 KPMG report found alternative finance globally had become a US$145 billion industry, growing 264% in just one year, from 2014-2015.

Digital lending is the process of availing credit online. Its increased popularity amongst new-age lenders can be attributed to expanding smartphone penetration, credit range flexibility, and speedy online transactions.

Fintech companies analyze digital payments data to underwrite in almost real-time fashion efficiently. This leads to all real-time transactions happening over the internet being replaced by fintech’s credit-based payment products, such as Buy Now Pay Later (BNPL) or Convert to EMI Products. These companies utilize their customer’s financial and transactional data to underwrite digital loans over an API-driven approach, thereby substantially lowering the time required to gain personal or payday loans.

Thus, online lending has played a pivotal role in evading cumbersome red-tapism usually involved while availing loans offline in a traditional setting.

Why do MSMEs prefer Digital Lending over Traditional Lending?

Digital lending is mostly preferred by those who are generally not able to avail any credit through the formal sources of finance, like banks. One of the major examples is the rise of growth of adoption by the Micro and Small Management Enterprises (MSMEs). The online lending platforms have gained massive popularity among MSMEs post Covid as they were unable to secure finance through the traditional lending institutions and thus had to go towards digital lending. The quick turnaround time and onboarding, easy KYC, as well as disbursement within minutes have attracted the cash-crunched MSMEs towards these digital routes to secure credit.

Lack of Regulation Leading to a Lack of Trust

There are many gaps that are existent in this model of digital lending like any new business operation. There have been numerous instances of unscrupulous activities that have come to notice, especially during the pandemic where unauthorised lenders provided credit to customers without any collateral and at exorbitant rates coupled with unachievable deadlines to pay off these humongous debts. Resultantly, borrowers were coerced by the lenders to recollect when they were unable to pay off these debts. Instances like these hit the trust consumers have and in the end harms the growth of the FinTech companies.

Furthermore, in light of this, the Digital Lending Association of India has issued guidelines against such illegal activities by unauthorised digital lending applications. There is a growing need for regulation in this space or unauthorised players like pointed out above will keep popping up. Stringent provisions must be formulated which can be enforceable legally. Regulation must be enforced in this industry soon to ensure consumer trust remains unfettered.

(By Nitin Mathur, CEO, Tavaga Advisory Services)

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