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Digital Lending has reasons to create a Niche

Digital lending is one of the fastest-growing fintech segments in India and it has grown exponentially from nine billion USD in 2012 to nearly 150 billion USD in 2020. It was expected that the digital lending market will reach a value of around 350 billion USD by the end of 2023. This business has mainly been covered by fintech start-ups and non-banking financial companies (NBFC).

India’s digital lending is expected to hit USD 1.3 trillion by year 2030, which will be four times growth in value term from USD 270 billion currently, according to a report by the technology information platform, Inc42.

It is expected that fintech-led digital lending will surpass traditional lending within 2030. The white paper titled “Fintech-led Digital Lending: Coming of Age” brought out by Experian India and Digital Lending Association of India (DLAI) predicts the same.

At present, traditional players dominate the asset-backed product segments, where fintech companies might need to expand into in the near future.

Digitisation of land records and properties, field verification of borrower authenticity, and collection digitisation are the areas which will augment the projected growth of the digital lending sector.

Interestingly, fintech firms are motivating the traditional lenders to accelerate their digital transformation journey and a result of that is the rise of co-lending partnerships between banks and fintech players that leverage competencies of both stakeholders.


Digital lending companies in India

Digital lending companies usually provide comparatively small loans to customers through apps or online platforms. In comparison to bank loans, digital lending does not require a specific bank account, requirements are lower, and the process is significantly quicker. Further, digital lending start-ups are increasingly becoming popular among customers and aim to meet the credit gap.

TRACXN data reveals that the total funding in the fintech was USD 2.21 billion in 113 rounds in 2022, as against USD 2.51 billion in 147 rounds in 2021, however amid challenging economic conditions for raising funds globally.


Funding the MSME sector

Besides providing loans for individuals, lending companies also serve micro, small, and medium enterprises (MSME), a thriving segment of the economy. An already high credit demand in this sector was fuelled primarily owing to the onset of the coronavirus (COVID-19) pandemic. Many enterprises were not eligible for the traditional banking loans and they had to look for alternative funding.

Analysts observe that banks and a majority of NBFCs are only able to cater to the SMEs having proven creditworthiness. Fintechs have the potential to provide credit and finance for MSMEs, besides revolutionizing lending for the bottom of the pyramid.


Factors that will favour growth

There are as many as 60 per cent burrowers in digital lending are first-timers. This also makes most of them new customers in the realm of organised lending. There are multiple reasons this segment of customers will find digital lending not only convenient but also suitable to their needs.

The pace of digitisation, especially in India, is no way slowing down as this is intertwined with the economy, and the policies. This will bring more burrowers and customers closer to the digital lending platforms.

Factors such as quick turnaround time for credit applications and making lending products accessible easily are expectedly going to improve, favouring the sector.

However, post-lending procedures like collections are yet to be digitised and these are dependent on physical interventions mostly, leading to increased delinquency rate and lower rollback. The Reserve Bank of India has recently issued a guideline but more well-thought out regulations will favour further growth, unique to the digital or alternative lending.

The benefits offered by the digital lending platforms, such as enhanced loan optimized loan process, quicker decision making, compliance with regulations and rules, and improved business efficiency, are expected to drive market growth. Traditional lending platforms relied on human interventions and physical interactions at every step, which increased the processing time and the chances of errors caused by humans. However, the digital lending platforms enable the banks to automate their entire loan process and thereby enhance customer experience.

Interestingly, the business process management segment of the digital lending market accounted for more than 30 per cent share of revenue in 2022 globally. The segment of business process management has gained importance and popularity as it helps minimize operational costs and increasing productivity significantly.

Business process management has a crucial role to play in digital lending sector. It improves customer experience, employee productivity, reduction of error etc. and these are also the primary factors predicted to drive the segment growth.


Blockchain, Big Data and Analytics

It is predicted that blockchain technology is going to propel transfer of documents with efficiently and integrity. This is expected to increase adoption of similar technologies among the digital lending providers. Blockchain technology will facilitate regulators and auditors, crucial participants in the lending process, verify identities and track transactions conveniently and swiftly.

Advancement in big data and cloud computing are driving the efficiency of business process management in the digital lending sector.

The growing use of digital lending platforms results in the transfer of sensitive and personal financial data over the internet. Naturally, data security across businesses using digital lending has been emerging as an area of concern. However, deployment of protective measures and precaution are going to be a must in this segment. In addition, digital lending providers will have to comply with data protection laws framed by the respective regulatory bodies in order to ensure protection of customer data from data breaches and other vulnerability.

Another segment, namely the ‘lending analytics’ is also expected to see a fast growth at least till 2030. Lending analytics makes lenders perform customer segmentation analysis and increase customer acquisition. Fast and efficient customer onboarding comes easier with lending analytics, thereby helping lenders enhance customer experience.

The increasing spending on technology, especially IT, in the sector is testimony to the robustness and reliability in general in the immediate future.


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