Digital Lending And Its Importance To The Indian Economy In The Post-COVID Era

India is one of the most affected countries from the coronavirus - a massive 45% economic decline in the three months between April to June 2020 and an overall 23.9 % contraction in GDP. In order to get back to growth, the role of medium, small, and micro enterprises (MSMEs) is very critical. In the US and other European countries trillions of dollars of loans have been provided to small business by the governments to keep the small business afloat. A great example of this is the e.g. SBA-PPP Small Business -Payroll Protection Program in the US to ensure that all small businesses continue to pay their employees. The SBA-PPP program was a great success because of the various digital lending platforms that participated to ensure the correct and quick disbursement of $ 600 Billion that was allocated. Financial inclusion is a key imperative for liquidity and availability of convenient access to financial services play a vital role in broadening and deepening the financial system. Digital lending has significant advantages over traditional lending, with the potential to address prevalent credit- related challenges in India

Even though MSMEs in India are vastly wide-ranging, they face a common impediment – the lack of access to formal credit. The MSME sector, though an integral part of India’s economic growth, continues to struggle with access to credit, with only 10% of small businesses having access to formal credit even though they contribute 38% of the GDP. For example, think of a small store owner who wants to seek credit to stock up inventory during peak season, a small furniture store owner who wants to get the raw wood needed for building the finished product, a considerable amount of small businesses faces such situations today. Banks and NBFCs typically address only super- prime and prime customers due to a lack of credit information and/ or high cost of customer acquisition through traditional branch models. This provides great opportunity for FinTech companies to penetrate the MSME market using Digital technology platforms.

One of the advantages of digital lending is speedier approval of credit. Credit evaluations and loan disbursals on digital platforms have significant quicker turnaround times than traditional loans. We can go from a loan approval time of days to minutes and disbursement from a week to within hours. Another key advantage associated with digital alternative lending models is the operating cost efficiency. Traditional lending models, usually, have high overhead costs due to complex and rigorous manual processes. Digital lending models, conversely, have technology-enabled operating and business models which require minimal human intervention, thus reducing manual operating costs. This model allows FinTech lenders to keep fixed costs nominal and aggregate a multitude of low-value loans, which enables them to serve previously credit-devoid MSMEs. Furthermore, FinTech lenders are also able to pass on the benefits of lower costs to customers, making their digital lending products attractive.

FinTech’s and System Integrators are responding to this market opportunity by capitalizing upon the needs and pain points of the consumers across the lending value chain for uncomplicated on-boarding/ KYC processes, prompt decision making and instant disbursals. Some of the factors why the disbursal turnaround time is significantly lower in digital lending are replacement of manual form filing by digital data captures, automated evaluations leveraging on technologies like advanced analytics, artificial intelligence (AI) and machine learning (ML) and no or little in-person visits. Another key feature of the modern digital lending platforms is Customized credit assessment models, which employ behavioral data to identify typical attributes for charging interest rates.

COVID has acted as an accelerant to Digital Lending especially given the economic impact and the urgency to get back on the growth trajectory. As per the Credit Disrupted: Digital MSME Lending in India report, today, 99 percent of formal MSME lending is met by incumbent banks and NBFCs, most of it non-digital. But these longstanding players are already expanding their existing lending capabilities into the digital realm. E-commerce digital aggregators like Amazon, Flipkart, and Ola, along with digital payment platforms like Paytm and PhonePe, are already providing MSMEs with noncredit services. With the evolution of the digital lending market, they are in a strong position to leverage customer data to expand into MSME credit. Digital lending success, articularly for underwriting, depends on strong supporting ecosystem. We are seeing the emergence of variety of supporting players

1. Credit scoring and verification services (examples: CreditMantri, Lenddo, Creditvidya)

2. Digital process enablers assist in executing operational processes such as eSign, eKYC, eStamping, etc. (examples: Signzy, Digio, LegalDesk)

In India, new-age FinTech lenders are currently playing a pivotal role in meeting the financial needs of individuals and businesses and disrupting conventional financial services by reaching out to who have traditionally remained unserved or underserved by traditional FIs. The effects of the disruption caused by digital lending across the spectrum of consumer engagement, origination, credit assessment, underwriting, risk monitoring, compliance, governance, and collection are still unfolding. Adopting technological innovations across the lending value chains will aid optimization of resources and processes, reduce turnaround time for approval and disbursal of credit/loans, facilitate intuitive and automated decision-making, and ensure accessibility of credit/loans for customers at rates tailored to their socio-economic profile.