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.
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.
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.
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.
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.
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.
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.
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.
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.
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