Digital Lending in India

1. Brief
2. India is one of the most underserved large economies when it comes to access to financial products, particularly access to formal credit. Our credit-to-GDP stands at a mere ~56%; for emerging market peers it stands at ~135% and for advanced economies, it’s at ~88%. The credit given by financial institutions is a key indicator of the country’s economic growth.
3. Digital lending, via websites and apps, has changed the way customers borrow money, by combining technological advancement with traditional banking services. This has led to seamless borrowing, faster loan disbursal with minimum paperwork, and expanded access to credit to a larger group of people, with digital lending growing multi-fold during the Covid-19 pandemic
4. One of the biggest trends anticipated in 2023 i.e. the rise of online shopping will increase the demand for credit among Gen Z and millennials. This will create an uptick in the digital lending space as more people will look for easy and low-interest lending solutions digitally
5. The digital lending market in India was worth 270 billion USD in 2022, and with a steady growth of CAGR standing at 39.5%, this should adjust to the 350 billion mark in 2023.

• Recent Trends
• One of the main reasons for the market growth is the creation of a robust platform that allows seamless banking practices like never before
• Mobile-First Approach
• Personalized Lending with Tech
• The demand for instant or “on-demand” loans is growing
• Fintech Partnerships and Ecosystems
• RBI’s guidelines on digital lending – Last year, the Reserve Bank of India (RBI) issued new rules to regulate and streamline digital lending activities in India. The new rules prohibited the automatic increase in credit limit without the explicit consent of the borrower.  Let’s watch out recent FLDG Guideline.
• Digital lending is one of the fastest-growing fintech segments in India and grew exponentially from nine billion U.S. dollars in 2012 to nearly 150 billion dollars in 2020. It was expected that the digital lending market would reach a value of around 350 billion dollars by 2023.
• Funding the MSME sector : Besides providing loans for individuals, lending companies also served micro, small, and medium enterprises (MSME). . Many enterprises were not eligible for banking loans and had to look for alternative funding.

• Factors that are helping bridge the financial inclusion gap:
  • Flexible Loan Amount: Starting from as low as Rs. 5 thousand to going until Rs. 5 lakhs, online lending platforms offer loans based on user’s need. 
  •  Fully customized loans: No two people are the same. And the personal needs of two different individuals might vary. 
  • Instant disbursement: Online platforms understand to ensure to credit the loan amount in your account within a few minutes of approval. With Availability of cKYC, Digilocker, Account Aggregator or other API based solutions, document verifications are just a matter of few seconds.
  •  No Bank Visits: Gone are the days when borrowers used to chase bank officials for loan approvals.

• Regulatory Support and Guidelines
• 8 June 2023, published a new regulatory framework, permitting the issue of default loss guarantees in digital lending (DLG guidelines).
• August 2022, and on September 2, 2022, the RBI released the Digital Lending Guidelines
• June 2021, outlining customer protection measures, data security requirements, and fair lending practices.

•  Technology Impact:
• #Blockchain: for secure and transparent lending transactions, ensuring data integrity and enabling smart contract execution
• #API Banking: allows digital lending platforms to integrate with banks and financial institutions for seamless loan disbursement and repayment processes
• #RPA is used to automate routine and repetitive tasks in the loan origination and processing, reducing manual efforts and errors
• #AI : AI-driven credit scoring models enhance risk assessment, automate loan underwriting, and enable lenders to make data-driven lending decisions

• Digital lending is a New battleground for India’s fintech startups With some Questions in 2023
• Why Personal Loans Is The Best Bet For Digital Lenders
• Will The BNPL Boom Translate Into Revenue?
• If BNPL is an unstable model, P2P lending is even more so, say fintech founders.
• Co-Branded Credit Cards: The Big Future Opportunity?

• Bottomline –
• Banks are collaborating with fintech firms to provide digital lending services, leveraging their existing infrastructure and customer base. Banks play a critical role in ensuring that digital lending activities adhere to RBI guidelines and other relevant regulations
• Digital lending in India is undergoing rapid transformation, driven by technology, innovation, and evolving customer expectations. As more fintech players enter the market and regulatory oversight strengthens, digital lending is set to play a pivotal role in expanding access to credit and reshaping the financial landscape in India. While adoption is growing, challenges related to data security, privacy, and responsible lending practices remain areas of concern that need continued attention and improvement
• FinTechs are looking to maximise the potential of digital lending while navigating a complex web of compliances and regulations, the RBI’s regulatory framework is structured to bring in an orderly expansion of digital lending in India. With technology continuing to disrupt the lending ecosystem, FinTechs are all geared up to ride the wave with sophisticated lending solutions and strategic partnerships with financial institutions.