By Surendra Jalan
Over the past two years, digitisation and the rising penetration of internet in India have irrevocably transformed the lending process from being extremely long and complex to a quick and technologically-exercise. The emergence of digital lending has challenged the stronghold of traditional financial institutions as the chief credit enablers in the economy while presenting consumers with an opportunity to access credit in a simplified and efficient manner.
Credit lending in India: Then and now
For decades, the credit lending market in India has been dominated by traditional banks and Non-banking financial companies (NBFC’s). Their complex policies and methods of operation have made it extremely difficult for the majority of Indians to avail credit. As a result, the gap between the demand for and supply of credit has amplified, while the number of underserved consumers in the country has risen exponentially.
Traditional banks still rely on outdated policies and methods of credit underwriting while still continuing to adopt narrow parameters for lending decisions, due to which many potential borrowers including individual consumers or MSMEs (micro, small, and medium enterprises) have been continually denied much-needed credit. According to the World Bank Findex, less than 20% of Indian households qualify for easy access to debt financing. Similarly, the unmet credit demand in the MSME segment amounts to over Rs 25 trillion.
However, over the past couple of years, there has been a dramatic shift led by digitisation in the lending segment. The emergence of Fintech and services such as India Stack, Electronic Know Your Customer (eKYC) and APIs have revolutionised lending. This has transformed the lending market from the clutches of traditional banking institutions and enabled individuals and MSMEs to avail debt financing through faster and more efficient means. The technology-driven alternative lending sector has spurred various lending models such as marketplace lending, crowd financing, and online peer-to-peer (P2P) lending all of which are evolving rapidly along with rising demand.
The rise of digital lending
Alternative lending companies running on these credit models operate primarily through digital channels and the entire underwriting process is carried out online using algorithms. Many digital lenders have their own proprietary algorithmS. For instance, P2P lending companies leverage at least 1,000 data points such as social data, Aadhar, credit bureau ratings, among many more to determine the repayment ability of borrowers and minimise risk.
A major upside of the use of digital lending is the absence of complicated paperwork and long waiting periods, as borrowers can receive the desired funds within hours or in a matter of few days depending on the strength of their credit profile. The system is also beneficial for lending companies as they save significantly by operating online and circumventing the need to set up and staff multiple physical establishments. These cost saving benefits are often passed down to customers in the form of lower interest rates, loan processing fees, and to lenders in the form of better returns.
The growing smartphone and internet penetration in the country has made digital lending one of the most effective and easiest means of obtaining finance for salaried individuals, self-employed people, and small and medium-sized businesses. In fact, the alternative lending sector has grown at around 106.4% year-on-year between 2016 and 2018 to reach a cumulative value of $241 million.
Furthermore, within the alternative lending sector, the business lending segment recorded a transaction value of $164 million across more than 1.1 lakh loans disbursed between 2016 and 2018. The consumer lending segment, on the other hand, achieved a transaction value of around $77 million in 2018, and the number of borrowers in this segment is expected to rise to more than 11 lakh by 2022. The online P2P lending industry, currently valued at $25 million is expected to grow to a whopping $4-5 billion by 2024.
The way ahead
In order for the digital lending sector to truly realise its potential and cater to the rising demand for credit, there is a need for constant innovation, investment in technology and building strong partnership networks within the Fintech ecosystem. The introduction of favourable government policies will also go a long way in expanding the horizons for SMEs and consumers in the country and will help achieve economic mobility and access to affordable credit for all.
Surendra Jalan is founder and CEO of OMLP2P