In a rapidly evolving world where change is a mainstay, it should come as no surprise that the banking sector has also witnessed tremendous transformation. The aftermath of a global virus in 2020 continues to resonate in 2021, necessitating further changes to traditional banking practices and norms.

One of the most significant and evident transformations is the advent of digital banking. Considering the magnitude of India’s population, bankers have always faced a challenge in expanding affordable financial services to the masses. Multiple efforts by the government and the RBI for financial inclusion piggyback on the access and convenience garnered by digitization.

DIGITAL BANKING ECOSYSTEM

Digital banking has, of course, addressed the gap in the lending ecosystem and has carefully curated products/services to cater to the rapidly evolving demands of consumers, such as offering personalized and more flexible borrowing experiences. It provides people with the convenience of acquiring a loan right from the comfort of their homes. Today, a few clicks on one’s mobile phone can help them get a loan sanctioned and credited into their accounts while helping them save multiple back-and-forth trips to the bank.

Digitization has also allowed lenders to eliminate long approval processes and endless documentation through the introduction of Artificial Intelligence and Machine Learning to loan disbursal processes. Massive amounts of data can be processed in seconds, enabling virtual screening for loan eligibility and quick and objective decisions, which have also shown to increase accuracy in approval rates for buyers and lower loss rates for lenders.

RISE OF NBFCs

A major outcome of digital banking is the rise of Non-Banking Financial Companies or NBFCs, with these institutions capitalizing on a huge gap in the Indian lending market. A recent estimate by the RBI shows that Indian MSME’s alone have a credit demand of almost $500 billion but the supply from formal lenders stands at a scarce $192 billion, leaving a huge credit gap of over $300 billion. This gap is commonly accounted towards the lack of formal financial data for credit assessment of borrowers, lengthy documentation processes and long turnaround time for disbursement by old-school banks.

Today, NBFC’s are plugging in these gaps, thereby attracting more consumers, many of whom are emerging mid- to small-size business owners or have been affected by post-pandemic unemployment. According to reports, the digital lending market is projected to grow from just over $100 billion in 2019 to well over $350 billion in 2023.

NBFC’s are also helping accelerate the evolution of digital lending by plugging in the gaps in the Indian credit market. Changing customer preferences, accessibility to loans, demand for smaller loans for daily requirements and popularity in usage of digital platforms are some of the critical demands being addressed by digital lending players.

TARGET AUDIENCE

A key factor for the popularity of the demand for digital credit is NBFC’s ability to cater to the requirements of young salaried employees and millennials, a segment that comprises a majority of the Indian population. With the economy gradually reeling from the challenges of the pandemic, salaried employees too are gradually sauntering back into the credit market with NBFC’s offering customized services such as personal overdraft, early salary, cashback credit cards, etc.

One of the most notable testaments to the transformation inspired by digital credit is in the MSME lending space. Five out of six MSMEs, today, lack the appropriate credit history or enough cash buffers for bank leverage to acquire the loans they need for growth. But with alternative credit options being offered by non-banking lending platforms, MSMEs or self-employed individuals with no financial records or credit history are now getting access to a variety of credit options.

With the quantum of credible data on MSMEs and self-employed individuals being recorded across by various fronts, like the Goods and Service Tax Network (GSTN), new-age digital lending platforms are able to access the right information for loan disbursals. GSTN, for instance, has a database of over 9.2 million MSMEs that are regularly filing returns every month. The GSTN provides an unfiltered and more expansive insight into the nature of businesses and, in the process, complements the conventional financial data. Adoption of such alternative data by non-banking lenders can allow them to offer a more varied and customized set of products to MSMEs based on requirements.

BENEFITS OF DIGITAL LENDING

Financial independence and accessibility are two imperative cogs in the fast-moving wheel of the Indian economy and the developments highlighted above can prove critical in the growth of smaller enterprises and eventually, create more employment and rope in more capital into the market. This particular demography reflects one of the most high-potential and high-value facets for the digital lending space to evolve further and is expected to prompt greater financial inclusion in the country in the coming years.

There is absolutely no denying the transformation that the lending sector is currently undergoing and will continue to develop, but digital loans do present a higher risk while collecting payments with no manual intervention to ensure the process. However, with the rise of new fintech companies, these anomalies are being addressed quicker and with progress, such risks will continue to be reduced or eliminated completely.