Introduction:
Digital lending is the service of providing loans and credit facilities with the help of digital technologies and online platforms by assessing the creditworthiness of the borrowers with the help of data analytics.[1] Digital lending in India has transformed the traditional lending process with the use of technology to make financial services more accessible and efficient. The rise of digital lending in India can be attributed to the increased penetration of internet and smartphones, and the growing acceptance of digital transactions among consumers. The government’s focus on promoting digital India and financial inclusion has also played a significant role in this change.
Many fintech startups and traditional banks have launched digital lending platforms[2] that offer different types of loans such as personal loans, home loans, and business loans. These platforms use advanced technologies like artificial intelligence and machine learning to assess the creditworthiness of borrowers, thereby reducing the processing time and making the lending process more efficient.
Evolution of digital lending in India:
The digital lending landscape in India has evolved rapidly over the years. India’s rise as a leading fintech market can be attributed to its swift embrace of technological solutions in lending. Initially driven by the need for financial inclusion, digital lending platforms emerged to cater to the underserved and unbanked populations. The evolution of digital infrastructure, increasing smartphone penetration, and changing consumer preferences played pivotal roles in shaping the sector.[3]
The digital lending market in India is poised for substantial growth in the coming years. According to a report by Boston Consulting Group and FICCI, the digital lending industry in India is projected to reach $150 – $ 160 billion by 2025[4], propelled by favourable demographic trends, increased internet and smartphone penetration, and growing consumer comfort with digital transactions.
The digitisation of the lending process is making it possible for lenders to reach a wider audience, including those in rural and semi-urban areas that have traditionally been underserved by conventional banking institutions. This is a significant step towards achieving financial inclusion in India.[5]
Moreover, the use of cutting-edge technologies such as big data, artificial intelligence[6], and machine learning in assessing credit risk is enabling lenders to offer loans to individuals and businesses who may not have a formal credit history. This is opening up new opportunities in the lending market and is an important factor in the growth of the digital lending industry.
The impact of Covid 19:
The COVID-19 pandemic brought both challenges and opportunities for digital lending platforms in India. While economic uncertainties led to a cautious approach in lending, the need for quick and remote financial solutions increased. Digital lenders adapted by implementing innovative risk-assessment models and introducing new products to meet the changing demands of consumers.
The pandemic, combined with government initiatives, bolstered the appeal of digital loans —known for their flexibility, rapid disbursal, and online accessibility.[7] In the wake of the pandemic, the government painstakingly spread the importance of going digital.[8] They actively promoted slogans tying India’s progress to the ability of its people to go digital. The lack of in – person interactions also compelled people to move to the online domain to be able to accomplish a lot of day to day tasks such as bank work and gaining education.
Challenges in the lending landscape:
While we have made some groundbreaking strides in our digital journey, there’s still a stretch of road ahead with a few hurdles. Despite the game-changing effects of UPI and the visionary India Stack initiative, about 1.90 crore Indians are still on the sidelines, awaiting full financial inclusion.[9]
The digital divide becomes even more evident in remote regions. For many, the absence of a robust credit history remains a significant barrier in their financial journey. Concerns related to data security and privacy have also been raised, necessitating robust measures to safeguard customer information.[10]
Navigating the regulatory framework[11] presents its own set of intricacies. While these regulations are crafted with the noble intent of maintaining integrity and fairness in the financial ecosystem, mastering this labyrinth isn’t always straightforward.
There is an ongoing challenge to strike that balance between streamlined processes and comprehensive due diligence[12]. And let us not forget about the realm of informal lending—it still looms large, with its unique challenges, notably concerning fair interest rates and associated risks.
Conclusion and Suggestions:
Looking ahead, the future of digital lending in India appears promising. Artificial intelligence and machine learning are anticipated to play a more significant role in credit scoring and risk assessment.[13] The integration of blockchain technology may enhance transparency and security in transactions.[14]
In response to the growing demand for digital lending services, many fintech companies and traditional banks are developing innovative solutions to improve the lending process.[15] These include the use of alternative data sources for credit scoring, the development of mobile apps for loan applications, and the integration of digital payment systems for loan disbursement and repayment.
While the digital lending industry in India is growing at a rapid pace, it is also important to ensure that this growth is sustainable and inclusive. This will require continued investment in technology, robust regulatory frameworks to protect consumers, and efforts to promote digital literacy among consumers.
Moreover, as more people gain access to the internet and smartphones, digital lending services will be able to reach even more potential borrowers. This is especially significant for India, where a large portion of the population still lacks access to traditional banking services.
The role of government regulation will also be crucial in shaping the future of digital lending in India. As the industry grows, so too will the need for regulations that ensure fair practices and protect consumers from potential risks. The RBI’s guidelines on digital lending[16] are a step in the right direction, but continual review and updating of these regulations will be necessary as the industry evolves.
Certain suggestions to improve the digital lending landscape in India are:
- Enhanced digital infrastructure –
- Banks need to invest in a robust digital infrastructure to support speedy and secure online transactions
- The government has to ensure widespread internet access, including to the rural areas.
- Digital KYC[1]
- The KYC process needs to be streamlined and digitized, removing the need for a physical form to be submitted.
- Aadhar based authentication needs to be promoted more actively to simplify the verification process.
- Mobile app development – mobile apps with a user friendly interface need to be developed so that people not very proficient with technology also find it easy to use.
- Data security measures –
- Stringent measures have to be put in place to ensure that customer data is secure.
- Banks need to actively comply with data protection regulations and invest in appropriate technology for maximum protection.
- RBI[2] needs to conduct surprise compliance checks on banks to ensure regulations are being followed and privacy measures are in place.
- Awareness campaigns – awareness campaigns need to be conducted for the to explain the benefits and risks of digital lending and to promote financial literacy
The successful implementation of these suggestions requires collaboration between government agencies, financial institutions, and technology providers. It is crucial to strike a balance between innovation and regulatory compliance to ensure a sustainable and inclusive digital lending ecosystem.
To conclude, while there are still challenges to be overcome, the future of digital lending in India looks bright. With its potential to increase financial inclusion and revolutionize the lending process, digital lending is poised to play a significant role in shaping the future of the Indian financial sector.
[1] Know Your Customer
[2] RBI – The Reserve Bank of India is the regulator of Indian banks
[1] Tojo Hose, What is digital lending?, INDIAN ECONOMY NET, https://www.indianeconomy.net/splclassroom/what-is-digital-lending/
[2] Adwait Jain, How has digital lending impacted the Indian Banking Market, SSRN, https://papers.ssrn.com/sol3/papers.cfm?abstract_The%20Indian%20governmenttook%20several,protection%forborrowersandlenders.
[3] Ibid
[4] Ruchin Goyal, India FinTech: A USD 100 Billion Opportunity, https://www.bcg.com/india-fintech-a-usd-100-billion-opportunity
[5] Supra note 2
[6] Pankaj Tripathi, AI Lending: Transforming the future of borrowing and risk assessment, DOCSUMO, https://www.docsumo.com/blog/artificial-intelligence-lending
[7] Namit Jain, The Evolution And Revolution Of Financial Lending In India, INC42, https://inc42.com/resources/the-evolution-and-revolution-of-financial-lending-in-india/
[8] CSC, Ministry of Electronics and Information Technology, https://csc.gov.in/digitalIndia
[9] Supra note 7
[10] Ibid
[11] Shubhradeep Nandi, Fintech is empowering but has its own challenges, INC42 https://inc42.com/resources/fintech-is-empowering-but-has-its-own-set-of-challenges/
[12] SWIFT, https://www.swift.com/your-needs/financial-crime-cyber-security/know-your-customer-kyc/customer-due-diligence-
[13] Supra note 6
[14] THE FINANCIAL EXPRESS, https://www.financialexpress.com/business/blockchain-the-prospect-of-blockchain-technology-in-the-lending-ecosystem-2575089/
[15] Supra note 11
[16] Digital Lending Guidelines, RBI, https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=3413
