Digital disruption: Is India ready for digital lending?

Covid-19 changed the way humans and businesses behaved, and some of the transformations forced by the pandemic may become the new normal. The nation-wide lockdown and social distancing norms imposed sudden restrictions. Business enterprises had to find a new way to operate. If a customer in a small town needed a loan, where would he go? Similarly, how would lenders find new borrowers since footfalls had reduced?

This is the sweet spot that fintech companies have rushed to fill in, armed with the RBI guidelines that allowed Video KYC to complete the Know Your Customer requirement. Fintech companies came out with several innovations that have made account opening a breeze. Today a loan account can be opened and activated with minimum human intervention in under fifteen minutes.

The digital lending landscape has also evolved dramatically. Today’s customer sitting in his town or village can apply for a loan using a digital platform, upload his identification documents and other details and get his loan sanctioned quite easily. The mountain of paperwork and the endless trips to the lender has become passe. The lender is finally able to reach the underserved areas of the country.

This change started with the Government's idea of India Stack in 2009. In the first stage, you got digital identity (Presenceless). The next phase involved sharing digital documents (Paperless). The third phase allowed digital payments (Cashless). The final layer was Consent that gave consumers control over their data.

The year 2016 saw the launch of the Unified Payments Interface by the National Payments Corporation of India. This revolutionized digital payments in the country.

The best thing about the Aadhaar card is that it has given every citizen an identity card as well as a digital signature that is used to sign documents. Digilocker, another government initiative to store documents in a paperless fashion is slowly gaining popularity as the regulators have started allowing it. The speed of adaptation in India is so rapid that any change mandated by the regulator is implemented overnight.

With the systems in place, Digital India is ready to move on to digital lending as the new normal. According to MEDICI India FinTech Report 2020, India’s lending start ups can function as alternate credit platforms owing to the Aadhaar verification, eKYC, and unified payments interface (UPI) platforms. These ensure rapid background checks, credit scores, and faster loans to the urban, rural, and underserved populations.

An incentivized adoption of regulatory sandboxes and central initiatives like the CKYC / Account Aggregator would fast track the process. This could create new value in end-user experiences and primary operations for the Banking and Financial Services industry.

Traditional financial institutions have never expressed a desire to serve risky, low-income consumers in smaller towns and villages. This underserved segment is being tapped by digital lenders who are leveraging the latest technology, lower costs, and alternative credit assessment models to bridge the demand gap and build a wider customer base.

As digitization becomes the new normal, both at the banking institutions-level as well as at the customer-level, digital lending will be based on trust and transparency of data. This will allow India to make giant meaningful strides towards becoming a more mature economy with broader participation of its citizens in the financial sector.

By Praveen Paulose, MD and CEO, Celusion Technologies