Digital lending in India: The year that was and the year that will be

With a global healthcare crisis and a historic economic slump, 2020 has caused unprecedented disruptions to practically every industry on earth. The digital lending sector has not been spared either from its wrath.

Since 2015, Indian fintech has witnessed the emergence of new players who rolled out innovative tech-enabled services like digital payments, P2P lending, insurance, and more, which revolutionized India's financial services landscape. In FY-19, the sector underwent a lot of transformation with regulatory reforms enabling hassle-free customer onboarding, quick and easy Aadhaar-based e-KYC processes, newer, more innovative credit risk assessment processes, a government push for paperless processes, and so on. The enormous potential of fintech didn’t go unnoticed by incumbent FIs like banks and traditional NBFCs, who either started building their own digital lending platforms or collaborated with new-age players.

2020 started on a promising note but gradually turned into a tumultuous one for lenders. As the countdown begins for 2021, what new challenges and opportunities does the new year bring for the sector, which is at the cusp of massive growth?

It's time we take a long, hard look at the year that was to decide where we can go from here.

Impact of COVID-19 on digital lending

The COVID-19 outbreak has put a strain on digital lenders. Liquidity management became the need of the hour, especially for smaller entities. The RBI's 3-month moratorium benefits, eventually extended to 6 months, resulted in a severe liquidity crunch for lenders giving small loans to micro-borrowers and having a smaller cushion of cash reserves. While borrowers got a reprieve from loan repayment during the moratorium, it became extremely challenging for digital lenders to lend and recover loans during this period.

The economic downturn triggered by COVID has exacerbated the situation. Salaried and self-employed people are grappling with layoffs and pay cuts, significantly reducing their loan borrowing and repaying capacities. In this bleak economic reality, the Indian middle class is uncertain about the future, resulting in them curtailing discretionary spending and avoiding taking new loans. The ones who’ve already borrowed are either struggling to repay or have sought loan moratorium. Result? A rise in NPAs, asset-liability mismatch, and deeper liquidity crisis.

The road ahead for digital lending

Every cloud has a silver lining. Gazing into the crystal ball, we can say that COVID-19 will reshape digital lending in the post-pandemic world. Businesses running on strong fundamentals will not only tide over the COVID crisis; they’ll continue to thrive further. Organizations who’ve built a culture of resilience with robust and empathetic leadership and can reimagine their business model to cater to the new business landscape can weather any storm in the future.

2021 is the year of new promises and possibilities for both lenders and borrowers. As the world awaits the vaccine and navigates the challenges of COVID-19, the new year will start on a note of optimism. While the pandemic's macroeconomic and microeconomic challenges will linger, businesses and individuals will slowly be more confident of a revival both on the supply side and consumption side. The need for borrowing will change from want to need for most people who’ll seek loans only to finance necessities such as health emergencies, education, etc. Sachet loans will be more in demand, with their popularity driven by a burgeoning millennial and Gen-Z population which is more prone to seek instant gratification. Lenders, especially traditionally risk-averse banks, will turn cautious as the threat of NPA looms large.

The future of lending is digital

COVID has woken up the industry to the tremendous potential of digital transformation. With the increasing customer demand for contactless processes, more lenders will adopt technology to offer maximum convenience to borrowers. Even traditional banks and NBFCs are realizing the need to digitize processes such as customer onboarding, risk assessment, loan underwriting, disbursal, and repayment to reduce costs of operations and deliver a more seamless customer experience. With services like video-KYC, Aadhaar-based KYC, websites, and apps with cutting-edge functionalities, loan application processes will become faster and more hassle-free.

The traditional credit underwriting process will also undergo a complete transformation. Lenders will increasingly use innovative technologies like AI, ML, and big data analytics to gather and assess data from multiple sources to evaluate an applicant's creditworthiness faster and more efficiently. For NTC borrowers and thin-file customers, lenders can use technology to access their alternate data sources such as digital footprints, payment history, credit card repayment behavior, online shopping, utility bill payments, bank balance, and so on. This helps them create a potential borrower's risk profile and reduce NPA risk. With technology enabling alternate credit scoring, lenders can extend credit to more people, thereby truly advancing the cause of financial inclusion.

Technology will continue to disrupt the digital lending ecosystem in the year to come, with a renewed focus on delivering enhanced end-to-end customer experience.

By Madhusudan Ekambaram, Co-Founder and CEO, KreditBee and Co-Founder, FACE (Fintech Association for Consumer Empowerment)