By Rajith Shaji
The cloud of debt is a scary one, discouraging people from even considering the option of credit or loans. Fortunately for better accessible financial knowledge, people are slowly learning the difference between good and bad credit. Consequently, they are also actively searching for institutions that allow them easy, secure access to credit to build their credit score.
The advent of Fintech has made it possible not only for the common man to access credit easily, but also made it a much quicker, cheaper, and more efficient process of application. Unlike the thick dockets of standard bank loans, comprising of years of hard work and weeks of running in circles, Fintech allowances for lines of credit are a seamless and attractive option to many. The result? A quickly closing gap in the credit consumption amongst Indians.
How has Fintech closed the credit gap?
Fintech has redefined what credit card usage is. What was once only considered a benefit awarded to consistently-employed, highly paid employees, has now become an accessible tool for anyone with a decent credit score and entry-level income (including varied incomes like freelancing, self-employment, and students). Not only are institutions recognising BNPL-enabled credit lines, but they are also awarding their usage — similar to cashbacks and rewards on traditional credit cards.
Unsecured and collateral-free loans
Banks run on the prerogative that their lent money is secure — which is what allows them to grant loans of astronomically high values. Unsecured loans, previously, have only been the foray of private institutions and loan sharks who have the comfort to gamble the amount while placing extremely high-interest rates to make up for the lack of security. On the other hand, banks have always demanded collateral that can be used to collect the loan amount in the case of EMIs being defaulted. Fintech companies have surpassed this collateral requirement by relying on data, credit personas, and individual customer profiles. With the help of analysing clients’ existing debts and repayment history, they comfortably grant lines of credit without the need for collateral — thereby making credit accessible to those without collateral.
Affordable Switching Costs
One of the key roles fintech platforms have played in making credit accessible is reducing the costs of choosing a credit provider. Fintech companies are remarkably more flexible with the information they provide, alongside being widely available to anyone with access to an internet connection. Unlike traditional lending authorities, which put great weight on the location of clients (along with the location of the loan usage and the collateral), Fintech has empowered clients to make smart searches and choose facilities at marginal processing and switching rates.
Streamlined Credit Approvals
One of the biggest challenges that fintech has addressed is the speed with which credit applications are processed. Between automating applications and KYC, alongside credit scores being digitally accessible, the approval for credit (either via cards or BNPL models) has become a shorter process. Unlike traditional loans, which can take weeks to process (and have high processing fees and multiple rounds of conversation), credit via fintech platforms takes as little as 24-48 hours.
The Fintech revolution has been a key player in bridging the credit gap in India. Traditional lending has been commonly associated with floating interest rates set by banks, or loan sharks targeting desperate consumers. Fintechs, in contrast, dismantle this persona of aggression and choosiness. The terms seem clearer, and the ability to compare plans online makes it easier to understand aspects of lending that banks initially kept very hush (such as consumer rights on early foreclosure, high-interest rates, and acceptable collateral).
However, fintech is far from replacing banks and traditional lending authorities. These institutions still hold massive resources that make lending feasible for larger amounts and for a wider array of opportunities (such as automobile loans, mortgages, and higher values of education loans). Rather than being replacements, fintech has become a bridge allowing smaller credit values and quicker turnaround times to become accessible to the general public. If anything, banks and lending societies partnering with a fintech platform would see the ultimate shift in credit consumption behaviour.
Is digital lending in danger due to the RBI crackdown?
With every new circular that the RBI puts out, Fintech consumers and NBFCs are equally concerned about the future of Fintech in India. However, it is important to remember that the RBI sanctions are designed with the intention of keeping consumer interests at the forefront, and the Indian economy and homegrown businesses a high priority.
For instance, the giant upheaval of the BNPL payment system caused severe disruptions for people using the NBFC-powered wallets and cards. The new framework will only intend to prevent dysregulated lending and allow customers to utilize the credit without worry. For instance, cards and loans powered through recognized and regulated banks remain largely unaffected by the RBI redesign.
(The author is CEO and Co-founder, Volopay. Views expressed are personal.)