The Rise of Retail Loans
The Indian lending market grew to 174.3 lakh crore in March 2022, up by 11.1% in March 2021, driven primarily by high value commercial and retail lending. Over the last few years, individuals have turned to various non-banking financial companies (NBFCs), fintechs and their digital lending platforms for faster credit, as compared to banks. These lenders have shown a preference for a large number of retail loans since these have a smaller risk of default as compared to high-value corporate loans. Pay cuts/ layoffs during the pandemic and the post-pandemic rising cost of inflation have further necessitated the financing of personal needs through loans. Even in the midst of the global gloom of an impending recession, banks in India witnessed a surge in consumer demand across segments last quarter, as India geared up for full-fledged festive season celebrations after two and a half years.
The Role of Digital Lending in Credit Expansion
New age NBFCs and fintechs lending through digital platforms have been able to address consumer demand by providing hassle-free and faster credit, especially for new-to-credit (NTC) or underserved sectors. The availability of real-time and reliable data on borrowers, fuelled by increased mobile internet penetration, has been a major contributor to digital lending in India. Lockdowns and restrictions on social contact during the pandemic promoted further adoption of digital credit, even in tier 2 and tier 3 cities. Traditional banks and NBFCs, too, are jumping on the bandwagon of digital lending either through their native applications or partnering with fintechs. This can be ascertained by a survey conducted by RBI of representative Banks and NBFCs indicating a twelve-fold growth in digital lending volumes between 2017 and 2020, driven majorly by personal loans.
Immediate Challenges in Digital Lending
The rise in digital lending has been primarily driven by technological innovations in mining data from the digital footprints of borrowers. Fintechs are able to respond faster to the rapidly evolving technological stack to facilitate digital onboarding, credit evaluation, and instant disbursals. Banks and NBFCs, however, by virtue of being regulated entities (RE), are less agile to changes in their technology stack and infrastructure to provide instant loans at scale. REs have partnered with fintechs as loan service providers (LSPs) and/or digital lending applications (DLAs) to improve their digital penetration.
However, the legal status for LSPs and DLAs, when playing as intermediaries between borrowers and lenders, is ambiguous under the IT Act 2001. This has led to a rise of multiple unregulated entities enticing customers to use digital lending apps, without proper guidance about consent for sharing personal data or awareness about the hidden costs passed to the customers. There have been several reports on instances of aggressive lending, collections practices, and the resultant tragic suicides in the last 2 years, further dampening consumer trust in the digital lending ecosystem.
Thus, it comes as no surprise that RBI has been assessing the digital ecosystem thoroughly, to ensure compliance with data and privacy protection. The most favorable change introduced by RBI in this direction was to enforce the transfer of funds between a lender and borrower only, weeding out the unnecessary third-party intermediaries in loan disbursal and collection of fees and repayments. In addition to addressing mandatory disclosures to be made to borrowers, RBI’s Guideline on Digital Lending also provides recommendations on the collection of digital data for credit decisioning with prior and explicit consent.
Even with customer trust and RBI’s compliance in place, the availability of dependable data itself, especially for micro, small and medium enterprises (MSMEs) has been a challenge. The majority of MSMEs being micro in nature (annual turnover under 5 Cr) don’t fall under GST or other taxation ambit and don’t maintain digital records of their financial transactions. Open Network for Digital Commerce (ONDC) will hopefully bridge this gap in the availability of digital data footprints of MSMEs in the coming years.
The 5Ds of Digital Lending
With regulatory compliance and ethical technology in place, the 5Ds – data, democratization, design, delivery, and decentralization can complement the 5Cs of credit (character, capacity, conditions, collateral and capital) to digitally assess the creditworthiness of a potential borrower.
- Data Digitally savvy users generate a rich digital data footprint across mobile apps and websites (banking, shopping, payments, wallets, social media, etc.). This has enabled lenders to profile customers on their capacity and character, be it traditional data sources (netbaking, investment statements, etc) and/ or alternative sources (SMS, social media, wallets, etc.) Alternative data sources have gained traction, especially in NTB or NTC customers to estimate income, and predict repayment behaviour in absence of banking or Bureau reports.Digital verification of GST, ITR, Udhayam Aadhaar has contributed similarly to improving digital data footprints of commercial entities. With higher adoption of ONDC in the coming few months, digital data availability on collateral would also improve, leading to standardizations and faster collateral valuations.
- Democratization Ethical implementation of technology can make Data Principal the decision maker on the use of their digital data assets. The more data (capital) a customer consents to share, the more she will have access to personalized services in the financial sector. Account Aggregator architecture facilitates data democratization across multiple financial transactions of the customers – banking, insurance, investments, GST filing etc., leading to a win-win scenario for both the customer and financial service providers, for faster decisions and competitive pricing.
- Design True financial inclusion would be driven by digital products designed for users from the remotest locations, varied vernacular languages, and minimal digital literacy. The rise in video KYC along with the use of Artificial Intelligence for face match has already started enabling remote onboarding. Technological innovations like OCR, and language translation APIs are making the form-filling process even more seamless. Credit underwriting, too, has witnessed more retail product offerings for the NTC segment. Increased use of Machine Learning models can help lenders have differential pricing to offset the potentially higher risks in financially underserved segments.
- Delivery Embedded finance is picking up pace since the financial services are delivered at the point of sale itself. Users can access financial services like BNPL, travel loan, auto loan, etc. at the merchant website, thus eliminating the tedious process of loan approval and disbursal separately. Lenders are able to better evaluate the purpose of the loan and collateral evaluation for secured lending when offering financial services. Instant loans at checkout points have lower customer drop-off rates as compared to conventional personal loan counterparts.
- Decentralization As the partner ecosystem continues to improve digital penetration, lenders would need to be agile in their technology developments, without compromising compliance for a robust architecture. Low-code solutions to integrate with multiple lending partners offers both agility and robustness to the lenders by decentralizing the software and hardware components that enable development of these applications. Low code solutions use modular and reusable components to decentralize the need for modifying technology stack for each partnership. A lender can potentially partner with one or multiple LSPs and/ or DLAs to assist in customer acquisition, credit underwriting, disbursal, recovery as well as assisted customer service to drive economies of scale.
How does Think360.ai’s credit underwriting stack combine the 5Ds of digital lending in its offerings
Delivers 90%+ completion rate and supports cKYC, eKYC, DigiLocker, VKYC (VideoKYC) and more to solve for access to remote credit.
Designs user journeys with auto capture and verification of customer details with AI-enabled solutions, reducing the need for lengthy form fill-up by customers.
India’s largest alternate credit score with 70MM+ AI scores delivered in real time. Augment device data with multi-bureau parsers, email and other data assets to assess the character and capacity of borrowers within 2 minutes.
- Hybrid Scorecards
Combining the traditional and alternate data assets for real-time assessment of all the 5Cs of creditworthiness of a customer, leading to an increase in straight-through processing (STP) and approval rate. The scorecards are customized for specific target customer segments.
A Sahamati recognized data analytics platform to build an AI-driven enrichment layer on democratized customer data to facilitate cashflow-based lending and personal finance management.
Uses graphical user interface (GUI) based API registration and drag-and-drop workflow orchestration for seamless and faster partner integrations, acting as a decentralized middleware for lenders and their partners to customize user journeys at scale.
The way forward
India’s digital lending has become a booming space for digital lending fintechs, P2P lending platforms and the rapidly emerging Buy Now and Pay Later (BNPL) and its variations in embedded financial services. While the last 5 years in this space have focused more on customer acquisition, credit assessment, and disbursement; lenders and their LSPs are actively working towards solving immediate challenges in recovery and customer service as well, to improve customer trust in digital lending.
Technological advancements (increase in mobile internet and availability of alternate digital data on borrowers) in tier 3-5 cities, combined with 5Ds of digital lending will lead to further credit expansion for true financial inclusion. The day is not far when lending to individuals through physical channels will become obsolete.
How India Lends – FY2022 by CRIF Highmark