Digital lending and the changing landscape of financial inclusion in India

For any modern and growing economy, the pillars it rests upon are that of financial inclusion. This entails providing access to financial services and products to individuals and businesses across the social sphere at reasonable costs in a timely manner, and customised according to the needs from responsible and reliable providers.

When it comes to India, it is a well-known fact that the country has been predominantly an economy that has been cash-based, and up until quite recently, digital payments weren't really that widely used.

Even if you talk about the core level, a major chunk of the population did not even have bank accounts until a decade ago, hence circling back to how we can make our economy more robust and increase our progression rate, financial inclusion becomes the need of the hour.

While recent years have witnessed an increase in emphasis upon financial inclusion, with the government making it a priority in economic policies, there still remains much to be done as access to credit from formal sources still continues to be a major challenge for a considerable section of the population.

Since one of the most important aspects of financial inclusion is appropriate access to credit irrespective of geographical location, measures need to be taken, especially for segments that are from the lower-income group.

When you come down to such a socio-economic scenario, digital lending becomes instrumental for the creation of various channels that can cater to the financial needs of the population that is underserved.

How can fintech enable financial inclusion?

Currently, fintech lenders are looking at developing innovative products that can cater to low-income, semi-urban as well as rural customers in sectors that are unorganised. This implies that the lenders are adopting operational and business models that deploy cutting-edge technologies such as open application programming interface (API), big data, and artificial intelligence (AI) that can facilitate the launch, implementation, design, and execution of products and services that have been customised, seamlessly.

Fintech is capable of revolutionising the financial landscape fundamentally as it offers consumers a wide array of products at competitive prices that makes financial institutions even more efficient. Since the scope of operations has broadened today, with the inclusion of insurance, stocks, bonds, peer to peer lending, suptech, etc., let us take a look at a few ways how fintech can enable financial inclusion by driving digital lending.

Digital payments

Unlike traditional banks that take a minimum of seven working days for initiating and approving loans, with online lending platforms, consumers can register on an online lending platform via smartphones, fill up the loan applications, and upload the required documents within minutes.

Digital credit lending apps can approve customers for a loan swiftly as compared to banks and NBFCs, going beyond geographical and credit-related limitations.

Additionally, since fintechs incur a lower cost as compared to brick and mortar establishments, the savings can be utilised for making investments in the latest technology, promotion of lower interest rates as well as reduction of processing fees for customers.

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Regulatory technology

Created for breaking down the barrier raised due to compliance, regulatory technology (regtech), can help the unbanked and underbanked sections of society gain access to financial services.

Regtechs create tools and services that can help in the automation of compliance tasks, thus, reducing friction, lowering the risk of fraud while at the same time perfect authentication and identity management. These solutions can help banks decrease compliance costs via the usage of predictive analytics and algorithmic platforms.

AI and machine learning (ML)

AI/ML-based systems can be utilised for analysing data to predict the creditworthiness of the potential borrower, and garner insights into the risk involved in lending. Since the systems are self-learning, there is continuous updating of the algorithm, in order to become risk-free over time.

Owing to the capability of AI for analysing vast volumes of unstructured data, it presents an unparalleled opportunity for extending the same benefits to the credit market. The technology, in fact, has the power to unlock that each year that does not go to collect were the SMEs currently due to the cost and time involved for the underwriting of these loans being too high.

As innovation and market expectations continue to drive the digital lending landscape, new-age startups are looking to ensure that the underserved population in India gains access to credit hassle-free.

Since more and more people are now seeking credit at affordable interest rates post-COVID-19 in order to mitigate the devastating impact of the pandemic, focusing on India's lower-income segment and underbanked population and offering them instant loans has become a pivotal need.

And as digital lenders are reliable sources of credit, they are definitely going to be the biggest contributors to bringing about the wave of financial inclusion in the country in years to come.