Here’s Why Digital Lending Is getting So popular in India

Coronavirus has changed the norms of finance around the world. Indian banks were performing well and progressing well before the arrival of Covid-19. And this was despite increasing competition from NBFCs and financial setbacks. Technology played an important role in the development of the banking sector. Earlier the digital loan market in India was giving competition to the traditional banking sector. But the pandemic exacerbated digital loan growth.

What is Digital Lending? Definition & Benefits

Many believe that fintech is one of the major forces that can clear the way for financial inclusion in India. The banking, financial services and insurance sectors have gained major traction in the last few years and have revolutionized the loan procurement and disbursement system through fintech. The growth of digital lending has been phenomenal.

Digital lending is the process of obtaining credit online. Its growing popularity among new-age lenders can be attributed to the expansion of smartphones, credit range flexibility and faster online transactions.

Fintech companies analyze digital payment data to efficiently underwrite them in an almost real-time fashion. All real-time transactions that take place over the internet are being replaced by fintech's credit-based payment products, such as Buy Now Pay Later (BNPL) or converted to EMI products. These companies use their customers' financial and transactional data to underwrite digital loans on an API-driven approach, significantly reducing the time required to obtain loans.

Thus, online lending has played a vital role in avoiding the hassle typically involved when availing loans offline in the 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 of any credit through formal sources of finance like banks. One of the prime examples is the increase in adoption by Micro, Small & Medium Enterprises (MSMEs). Online lending platforms have gained massive popularity among MSMEs post-Covid as they were unable to secure finance through traditional lending institutions and thus had to switch to digital loans. Quick turnaround times and onboarding, easy KYC, as well as disbursements within minutes have attracted cash strapped MSMEs to these digital avenues to secure credit.

Also Read: How to Interpret CIBIL Credit Information Report

Lack of regulation gives rise to a lack of trust

Like any new business operation, this model of digital lending has many drawbacks. There have been several instances of unethical activities, especially during the pandemic, where unauthorized lenders provided loans to customers without any collateral and at exorbitant rates coupled with unreliable time limits to pay off these huge loans. As a result, borrowers were forced to recall by lenders when they were unable to pay these loans. Such instances affect consumer confidence and ultimately harm the growth of fintech companies.

Further, considering this, the Digital Lending Association of India has issued guidelines against such illegal activities by unauthorized digital loan applications. There is an increasing need for regulation in this area or the unauthorized players mentioned above will continue to emerge. Stringent provisions should be made which can be enforced legally. Regulation should be implemented in this industry soon to ensure that consumer confidence remains unbridled.

The Government of India is promoting digital credit growth in India in the following ways: 

• Policies and norms

Significant interventions by the Government of India such as the federated consent architecture and the newly created payments ecosystem are proving to be the catalyst for digital lending in India. There have been some amazing moves lately regarding interest rates and liquidity regulations. A list of all these measures is enabling fintech and NBFCs to serve their customers more easily and efficiently.

• Video KYC (Know Your Customer)
  We are all trying to avoid any social contact during COVID-19. But the lack of field visits can affect the speed of KYC. RBI has provided a solution to this issue in the form of Aadhaar card-based KYC of customers over a video call. Video KYCsare cost-effective and reliable for customer onboarding with efficiency. This route of KYC is an advantage for banks and NBFCs.
• Demonetisation
  On 8 November 2016, India suddenly went into demonetization. Some currency denominations were no longer of use to the people. These circumstances revived the dormant digital payments culture in India. NPCI recognized the need of the hour and came up with innovative apps for digital payments such as FASTag for toll collection, IMPS and UPI.The popularity of digital payments is one of the reasons for the emergence of digital loans in India. Indian fintech companies took advantage of the demonetization. They levelled up and upgraded the game in terms of new technology. They used technology to provide a seamless experience to their customers. The declining internet cost in India also went in favour of the fintech business model.

The following factors should be credited for the bright future of the digital loan market in India: -

• Efficient processing

NBFCs, fintech and digital lending companies have more efficient decision making. They have the technology to examine buyers’ credibility with a single click. They can immediately decide whether to give the loan or not and for what amount.

• High-end metrics
  The evolution of digital lending in India is progressing on advanced and sophisticated metrics. Data is processed at speed. Lending companies have a better understanding of the profile of the customer. At the same time, analytics allow the digital loan platform to make safer decisions.
• Strong integration
  Companies with the business model of digital lending depend on strong integration for their seamless functioning. They have a good cloud-based connection with data sourcing agencies and credit bureaus. They also have a system of internal data sharing between branches and employees. In this way, they collect comprehensive information from both internal and external resources.
• Customer-centric approach
  The main ambition of India's digital loan market is to provide ease of documentation and processing. Millennials who are salaried or own a small business love this time-consuming and convenient experience of getting a loan. And best of all, efforts are on to make digital loan processes more user-friendly and streamlined.

Also Read: How do I choose between an offline and an online quick loan?

Here are some tips to avoid falling prey to fraud while availing of digital loans: 

• Banks or NBFCs never ask for your sensitive information like bank details or Aadhaar numbers over call, email, SMS, WhatsApp etc. You should never give such information to unknown agents.
• Be careful while using banking websites as fraudsters create similar looking websites with identical web addresses. You should always check that the website starts with HTTPS and not HTTP.
• Scammers also create fake banking apps that look like authorized banking apps. Therefore, you should download the app by scanning the QR code or visiting the link from a trusted source.
• Use a secure internet connection and avoid public Wi-Fi in crowded places like cafes, malls, etc.
• Always avoid sharing your online account or internet banking details with anyone.
• Protect your gadgets with updated antivirus software.
• Always be cautious and look for red flags when giving any of your details online for any reason.
• Stay updated with cybercrime news so that you are aware of new fraud techniques.
• Change your PIN and password after a certain interval.
• When you submit copies of your KYC documents to the financial lender, mention the date and reason in the space below your self-attestation.
• Do not click on links or attachments received via email from an unknown source.
• Cut out multiple copies of documents you no longer need.

To Conclude

Digital lending has proved to be one of the major instruments contributing to financial inclusion in the country. Knowing that digital lending is the future, many big players have entered the digital lending industry. With a plethora of financial institutions ready to offer instant digital loans, a customer must take the necessary precautions and choose the right product and lender. Before taking a digital loan, make sure you consider all these points to make your digital loan process easier.

FAQs - Digital Lending

• What is meaning of digital lending?

The Digital leading definition provided by RBI reads as follows digital lending allows a borrower to apply for financial services from any remote location with the use of interest services.  Digital Lending also referred as digital consumer lending helps banks to increase their production and loan profits. Digital lending services help financial institutions for faster loan approval, customer acquisition, disbursement, the credit assessment, recovery, and customer services.  Digital lending has helped both borrowers and lenders as it has reduced the time for borrowing.  

• What are the benefits of digital lending?

Since the introduction of digital lending, MSME digital lending has been one of the popular terms in the market.  Generally, borrowers move towards digital lending as there are unable to avail of loans from formal sources. Borrowers such as MSMEs are prominent borrowers when it comes to digital lending. It has helped them to avail of loans easily and rapidly. There are various benefits of digital lending such as improved loan disbursement process, boost efficiency, and less time consumption in capturing the customers’ data.