Can digital lending assist with digital financial inclusion?

Digital technology has revolutionised a plethora of sectors in recent years, and the financial industry is no exception. Fintech disruptions have sparked a digital lending revolution in India by delivering superior customer experiences, streamlining age-old processes, and instant decisions while reducing costs.

Over the past 10 years, India has experienced a remarkable 39.5% compound annual growth rate (CAGR) in the digital lending market, fueled by factors like rising per capita income and improved internet access in urban and rural areas. Regulatory initiatives and a robust digital infrastructure have further propelled the country's credit landscape transformation. The thriving funding environment has positioned fintechs as one of the most well-funded startup domains, driving continuous innovation in the sector.

The role of digital lending

Digital lending serves as a powerful solution to bridge the credit gap faced by a significant portion of India's population residing in rural areas, where 65% of the population resides and conventional financial services remain inaccessible. Similarly, with a limited credit history or collateral, a huge part of the population is excluded from the traditional credit ecosystem. However, digital lending platforms use technology and alternative data sources to assess creditworthiness, enabling them to provide loans to these underserved segments. This opens doors for individuals to pursue entrepreneurial ventures, invest in education, address healthcare needs, and improve their overall standard of living through formal credit access. Moreover, digital lending plays a pivotal role in unlocking the untapped potential of Indian micro, small, and medium enterprises (MSMEs) by effectively addressing the staggering credit gap of approximately Rs. 20-25 lakh crore. 

Digital lending offers significant advantages in terms of simplicity and convenience. Unlike traditional banks that require physical visits and extensive documentation, digital lending platforms enable borrowers to apply for loans from anywhere. Streamlined application processes and minimal documentation requirements reduce turnaround time and effort for accessing credit. Technological advancements, such as e-KYC, facilitate faster customer onboarding and reduce costs by approximately 85% compared to manual KYC processes.

MSMEs, women, youth, and rural populations have emerged as profitable customer segments, and empowering them with tailored credit opportunities drives growth, enhances customer loyalty, and supports overall economic development in India. This makes digital lending a game-changer for budding businesses, particularly empowering last-mile entrepreneurs in Tier II, III, and IV cities. The impact is evident with the significant increase in women seeking business loans, with a threefold rise in the past five years and a 12% increase in their share in the overall business loan portfolio (2017-2022).

Fintechs offering digital lending options are able to effectively cater to MSME borrowers, compared to any other type of lenders. Digital lending has also significantly powered product innovation, allowing fintechs to offer tailor-made products for this segment. MSMEs need customised loans to address their working capital gaps, technology needs and expansion plans. These requirements are now being fulfilled by leading fintech players who are giving wings to the ambitions of these last-mile entrepreneurs, by empowering them to tap into mature market linkages and take advantage of the startup landscape or global opportunities. 

It becomes crucial to address regulatory hurdles and safeguard consumers. The absence of a comprehensive legal framework for digital lending raises concerns about transparency, data privacy, fair lending practices, and overindebtedness. A recent RBI working group identified around 1,100 lending apps available to Indian Android users, of which nearly 600 were found to be illegal. These unauthorized apps pose significant risks, offering credit at exorbitant prices, exploiting consumer data, and employing aggressive recovery practices. Such practices not only harm individual consumers but also undermine the trust and integrity of the entire digital lending industry. 

Despite these challenges, digital lending remains a driving force for financial inclusion and India's Digital India agenda. These platforms democratise finance, streamline processes, and foster entrepreneurship through technology.

Ishpreet Singh Gandhi is the Founder of Stride Ventures and Stride One.