Remember the time we had skip work for a day or two to visit the bank and complete a ton of paperwork to avail a loan, albeit a small amount? Well, thankfully things have changed with ‘Digital Lending’ – a phenomenon disrupting the global lending industry. In this article, we will look at digital lending in the context of the Indian subcontinent.
According to a July 2018 report by Boston Consulting Group (BCG), Digital Lending in India is a $1 trillion opportunity over the next 5 years, with over 1000+ fintechs founded in India over the last 7 years.
What is digital lending and how is it impacting us and the larger society?
The unique proposition of the digital lending business model is agility, zero physical presence and a promise of quick turnaround time: from the moment the loan is applied through a digital channel to the borrower receiving the approved loan amount in his/her bank account. The borrower provides basic information such as Aadhar and mobile number on the digital lending platform, via a hand-held device or a personal computer. This sets in motion a series of checks and validations to determine the credit worthiness of the borrower. Mobile SMS messages related to the borrower’s banking transactions evaluate the financial standing of the borrower, while information such as contacts list, internet surfing patterns and social media activity derived from mobile data, determine behavioral attributes of an individual. Simultaneously, the capture of Aadhar data triggers e-KYC for digital address, employment and income verification via real-time integration with Government, legal and other databases. Deploying appropriate algorithms and analytics can provide a reliable credit score of the borrower. The score thus derived using non-traditional scoring techniques as explained above, is termed ‘alternate scoring’.
Traditional methods of underwriting include extraction of scores from credit information agencies such as CIBIL. For business borrowers, traditional methods of underwriting include bank’s proprietary credit models as well as reports from credit rating agencies such as CRISIL, CARE and ICRA.
Alternate scoring is indeed the cornerstone of digital lending, which also serves a broader social cause of enabling credit to the vast majority of people in the world, with little or no credit history. Leveraging the power of the Government’s JAM vision – Jan Dhan, Aadhar and Mobile, and most notably the IndiaStack, digital lending is transforming the lives of the unserved and underserved strata of the Indian society. (IndiaStack is a set of APIs that allows governments, businesses, startups and developers to leverage the digital Infrastructure to drive India towards presence-less, paperless, and cashless service delivery. Reference: Vikaspedia.in)
A study of digital lending companies in India that have sprung up over the last 5-7 years, suggests interesting trends. Most fintech companies with digital lending platforms are in the business of offering personal loans. Mobile-only or mobile-friendly ‘apps’ typically offer loan amounts ranging from 1000 to 1,00,000 INR. The loan approval happens within a few minutes of signing up using alternate scoring methods. In scenarios where fintech companies play the role of marketplaces or aggregators, proprietary algorithms using machine learning technologies are deployed to generate an ‘alternate score’ using borrower information entered in the website. Fintech companies share the derived ‘alternate score’ with partner banks, who combine this with their internal credit model to provide their respective quotes in response to the borrower’s needs. The marketplace or an aggregator model is a win-win model, in which banks are able to increase customer reach with no additional investment while digitizing and optimizing the customer acquisition process in return for brokerage fees provided to the fintech partner.
A category of personal loans which is hugely popular is ‘salary advance’ loans. Such loans can be provided in partnership with the employer, with the convenience of salary linked deductions. A variation of salary loans is independent of the employer and is provided based on employment, income and alternate credit scoring parameters.
Specialized fintech companies have found their niche in various other segments of personal loans. Student loan is a popular business in India with loans ranging from school fees to funding of undergraduate and post graduate programs in India as well as overseas. The home loan segment which has been the forte of traditional banks and NBFC’s until recently has made inroads into digital lending, with fintech companies offering loans for home purchase, repairs, interiors as well as down payment assistance for availing home loans. Another specialized category in digital lending is healthcare financing with fintechs offering loans in partnership with banks/ NBFC’s for medical equipment finance, clinic or hospital upgradation loans and most importantly patient finance for funding of treatment costs.
Invoice financing is gaining traction in digital lending as a B2B marketplace, enabling vendors to obtain collateral-free short-term finance and investors the opportunity to invest in high-return low-risk investments. As in the earlier categories, fintech companies add value to investors by pre-vetting SME’s as well enabling automated portfolio management on the platform.
Fintechs in the peer-to-peer (P2P) lending business connect qualified borrowers to verified investors via the digital marketplace. Fintechs are engaged in comprehensive risk assessment of borrowers in addition to assisting with physical verification (if required), contract finalization and ongoing loan monitoring and collections.
India’s foray and growth in digital lending is clearly attributed to the following factors: a) the supportive government & regulatory environment promoting new services leveraging the IndiaStack, b) new age digital technology advancements in artificial intelligence and mobile-internet technology c) the surge of mobile internet users in India enabled by affordable smart phones. India is slowly but steadily catching up with the global momentum in digital lending. It is believed that digital lending can steer the country towards a digital economy by powering financial inclusion.
Digital Lending report by Boston Consulting Group, 2018
Research of digital lending companies in India and globally