How digital lending impacts credit-starved consumerVinod Easwaran
In 2016, IMF’s Financial Access Survey reported 69% growth (from 2012) in number of deposits accounts in India. For the same period, the report stated a meagre 15% growth in loan accounts. Back in 2014, World Bank (in its Global Findex Survey) had reported that less than one out of seven applicants had received a formal loan in India. Jump to 2017, and things haven’t changed much. TransUnion CIBIL reported that the major effect of demonetisation was on the decline in retail loan origination, even after a rebound in credit demand in the first half of 2017. So far, the penetration of retail credit in the Indian market has not been promising – driven by slow growth rate and adverse effects of demonetisation.
Traditional lending institutions, namely banks & Non-Banking Financial Companies (NBFCs), continue to remain majorly dependent on physical operations. These still follow the old routes, of being dependent on credit scores, physical documents & inspections, to assess an applicant’s creditworthiness. Even though these institutions have adopted systems for data capturing and performing smart analytics, the utilization of such systems has been limited to the fulfilment and repayment processes for their existing borrowers. For individuals who have never availed a loan before, applying for a loan remains a daunting task with a tiresome and unappealing customer experience - where approval and fund disbursement takes weeks after application submission at a bank or NBFC.
With Government initiatives (like India Stack & Digital India Programme), launch of affordable smartphones, improvement in digital infrastructure, and exposure to ecommerce platforms; the internet penetration is at an all-time high - 462 million internet users in January 2017. It was also reported that there were more than 200 million digital buyers (in 2016) and the current annual retail e-commerce sales is around USD 20 billion, stamping the high growth rate of acceptance of online avenues for both information and financial transactions.
Digital lending is on the rise
Addressing the quick and convenient needs of the Indian consumer, emerged a new group of players in the banking and finance space, competing with traditional institutions - FinTech platforms. These FinTech players have slowly become a common name in every household – be it for digital payments, instant money transfer, or easy retail loans. Driven by technology & data, and a thirst for market share; these start-ups have innovated and delivered quicker turnaround time, better customer experience, lower fee, and higher transparency.
The credit segment, too, has witnessed the birth of various business models; leading to the terminology ‘digital lending’. However, most of these digital lending platforms currently deliver a digital experience only at certain stages of the loan lifecycle. There are platforms that enable an end-to-end digitalisation of the retail loan lifecycle and are named ‘Lending-as-a-Service’ (LaaS) platform. As the name suggests, these LaaS platforms have transformed the long and complicated traditional process into a quick, smart and convenient one. Digitisation facilitates convenient delivery of services as consumers can log onto these digital platforms from their smartphones, fill out a simple loan application, upload the necessary documents, get instant approval, and receive funds - directly in their accounts. All that, in a matter of minutes.
The personal loan segment, particularly, has seen significant amount of innovation with borrowers having easy access to credit for a number of purposes be it medical, travel, home renovation, family functions, festive expenditure, second-hand vehicles, etc. The applicants need not go to the bank anymore, nor do they need to have a prior credit report. Moreover, borrowers can also avail loans for amounts as little as Rs. 50,000 through digital platforms; unlike some banks which often consider personal loans below Rs. 1 lakh as a high-risk proposition. This enables individual borrowers to access funds, at the tap of a click, in order to meet their capital requirements. These lending platforms also have the capability to assess a borrower’s creditworthiness within minutes. All by applying statistical and machine learning algorithms onto customer data accumulated through non-traditional sources such as social media, education profile, work profile, email, SMS, service usage, and transactional information. As a result, ensuring a much faster turnaround time and a ‘Wow!’ user experience.
What the future holds?
With government initiatives solving the operational bottlenecks across various stages of the loan lifecycle, it has become imperative to embrace alternate methodologies for credit underwriting (which continues to remain the prime reason for slow growth of credit penetration). Proof of Concept (POC) of this alternate credit-risk analysis is the recently launched Airtel’s Online Store, a first of its kind initiative in the Indian market. Here customers are assessed based on alternative data. They can buy a premium smartphone with affordable down payments, instant credit verification and credit financing. All without financial documents.
In the coming days, we can expect the unveiling of new credit scoring algorithms leveraging vast pools of data with cutting-edge technology, Machine Learning, Artificial Intelligence & Predictive models to enable a large customer pool to credit underwriting.
A new wave of lending is on the rise and will wash away the existing limitations which have kept the Indian masses underserved for decades.