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