A look at the lending ecosystem and the trends fueling its future

In 2020, the Indian banking, financial services and lending landscape faced massive challenges. The COVID-19 pandemic created shockwaves in nations across the globe, causing short-term recessions and stunting long-term growth.

According to a report by PricewaterhouseCoppers on ‘Mapping the Indian retail lending landscape’, in the first half of 2021, the pandemic aggravated pre-existing systemic problems in India’s banking sector - be it macroeconomic problems, extensive debt restructuring, depreciating asset quality, multiple financial fraud, and money laundering cases.

Also, in the first of 2021, the same report details that, overall, lenders had shown a preference towards retail credit over corporate credit. The report also posits that there has been a growth in the personal secured loans vis-à-vis institutional credit after the pandemic.

Between the period of March and October 2020, personal loan disbursements saw a rise of 2.3 percent, while corporate loan disbursements saw a downtick of 5.7 percent. Non-bank finance companies (NBFCs) and smaller lenders felt the brunt of the pandemic; more than the established private and public sector banks.

In the midst of all these challenges, developments and roadblocks though, the Indian banking and financial services has shown exemplary resilience. Lending trends have remained strong and there are strong signs of recovery and growth in the sector.

The credit landscape is one of constant evolution, innovation and growth. Changing customer preferences, ease of access to credit, a rise in the demand of smaller ticket loans, increased usage of digital platforms and the inclusion of non-traditional lenders in this ecosystem point to a space that evolves continuously, even after a cataclysmic event such as the pandemic.

Here, we look at the lending ecosystem - the exciting developments, disruptive innovations, and the trends pushing it forward.

The state of the sector - India’s lending ecosystem

According to the report ‘How India Lends, FY 2021, by CRIF High Mark, an RBI-approved credit bureau, the total size of the lending market in India (as of March 2021), stood at Rs 156.9 lakh crores - a hundred percent growth from FY 2017 to FY 2021.

Also, in the last five years, the retail lending portfolio has grown by 91 percent, micro lending by 157 percent, and commercial lending by 93 percent.

Based on estimates, credit demand by micro, small and medium enterprises (MSMEs) in India is quite high. However, the overall supply from formal sources is scarcely able to match this demand. Overall, there is a gap of 67.3 percent that banks and other established financial institutions are unable to serve.

This has opened the doors for new-age digital lending platforms, the rise of NBFCs, new borrowers increasingly emerging from non-metro cities, disruptive technologies and more. Here’s a look at some of the most interesting developments in the lending sector.

Trends in the lending sector

The Indian lending sector is a dynamic space, with many trends and transformations occurring. In the last few years, technology has emerged as the true gamechanger, emboldening fintechs to revolutionise lending in India, while simultaneously reframing the way traditional financial players are approaching the sector. Here are some of the top trends that are leading lending into new avenues.

End to End digitisation: the most significant trend the sector is seeing is the increasing role of digitisation. This shift will help financial institutions and banks to streamline operations like information collection, data analysis and organisation. Automation will assist employees and increase efficiency in organisations. Automated platforms will offer swift and consistent credit approval, while digital lending platforms will speed up the process of loan servicing.

The rise of AI/ML in lending business processes: Artificial Intelligence (AI) and Machine Learning (ML) have already proved to be transformative forces for the fintech sector. Now, a variety of companies are incorporating them into different segments of the industry - lending being one. Lenders are now looking at how AI/ML can automate complex processes, such as checking for frauds, automated loan offer generation, credit scoring and more.

Blockchain to break new grounds in lending: Blockchain is revolutionary as it is, however now the technology is being considered for the improvement of many financial services and products. Currently, blockchain is assisting with different processes in lending, including accelerating loan processes, providing data on real-time transactions, increasing the control that borrowers have over their loans, the management of loan payments and more.

The availability of small ticket loans: Banks are often reluctant to entertain small ticket loans, due to small profit margins and high underwriting costs. Millennials, who often have little or no credit history, are looking to fintech lending companies, with their “buy now, pay later ”(BNPL) loans. Flexible in nature, these loans often come with zero-interest rates, and allow borrowers to pay back in easy installments. According to a report by TransUnion CIBIL and Google on “Credit Distributed” the future of lending is digital. The report states that NBFCs saw a 30x growth in outstanding balances, and what accounted for 45 percent of all personal loans disbursed in 2020.

Self-service and omnichannel capabilities: Both these elements place the customer at the centre of the lending ecosystem. By opting for self-service - from applying for a loan, to receiving the funds - the entire process will require little to no manual intervention. Self-service will also reduce the interactions between the customer and lender, and remove the undue burden of redundant loan work by employees. Customers will also benefit through the availability of omnichannel communication. They can choose between the website, apps, text messages or even social media platforms.

The move to non-tier-I markets: With the increasing penetration of smartphones and the growing coverage of the internet, people in Tier 2, Tier 3 and Tier 4 cities are showing their preference for digital lending channels. Users in remote places can now access digital lending platforms and loan products with ease.

The pandemic has challenged the banking and financial services sector in many ways. However, it has also paved the way for new organisations and new innovations to revolutionise this space. We’ll examine these developments in the 5th edition of the AWS Fintech Forum, where the brightest minds discuss the biggest breakthroughs in the fintech sector. The event will take place on November 25 and 26. You can register here, and be a part of the conversation.