Is digital lending answer to credit needs of underserved in India’s tier 2 towns?

A large part of India's population resides in semi-urban and rural areas. Financial inclusion of India’s unbanked and underbanked population is a key goal for the growth of India’s economy, and credit accessibility is one of the crucial components that can help in achieving this goal.

A majority of India’s population living in Tier-2 cities, including MSMEs, have faced challenges in getting timely credit from formal lending channels due to a lack of essential banking services and credit history along with cumbersome loan application processes.

In such a scenario, the emergence of digital lending players has played a significant role in providing timely credit to this segment of the country.

According to industry reports, the digital lending market is projected to grow from $100 billion in 2019 to $350 billion in 2023. While digital lending platforms have witnessed rapid adoption for their offerings in recent years, there is a massive untapped opportunity for digital lending players to further expand their reach and provide adequate credit to the last mile. Here are some of the key factors that will support this growth

With growing smartphone and internet penetration, consumers are rapidly turning to digital avenues for their financial needs. The outbreak of the COVID-19 pandemic and the emergence of digital apps and platforms have further supported this shift.

Consumers falling under the New-to-Credit category including millennials, Gen Z and salaried individuals are also driving the digital revolution in Tier 2 and Tier 3 cities as they are looking for formal lending institutions for their credit needs. According to a survey by financial firm Home Credit India titled 'How India Borrows' (HIB), nearly 40 percent of borrowers, led by millennials, showed the willingness to move to digital platforms for taking loans.

Consumers have become aware of the benefits that digital transactions offer including ease of access, remote operations and quick turnaround time. New-age digital lending platforms have introduced disruptive lending solutions enabling borrowers to access credit through easy, secure, and transparent loan application processes.

Technology has been a game-changer for the lending industry by addressing key challenges that stand in the way of credit accessibility. Digital lending players are leveraging new age technologies and algorithms to streamline and automate the entire lending process that provides a smooth and efficient experience to borrowers that help in fostering relationships.

New-age tech like artificial intelligence and machine learning optimise the process through predictive analysis enabling lenders to improve customer engagement. It also enables seamless customer onboarding through personalised solutions and helps lenders with fraud detection at the beginning of the process.

For many years, creditworthiness of borrowers was assessed on the basis of their credit score. A large part of the population, including MSME enterprises, have majorly suffered due to this.

According to a report by BizFund, only 16 percent of MSMEs in India get formal credit, leaving more than 80 percent of them credit starved. Owing to this, a large number of these enterprises turn to informal credit sources increasing the risk of credit fraud. By leveraging alternative data sources like e-commerce payment history, employment history, telecom bill payments, social media activities, and other spending patterns, lenders can map the creditworthiness of borrowers, bringing more people into the formal credit system that will help in driving financial inclusion of India’s underserved population. Adoption of alternative data sources can even help in offering customised solutions to borrowers.

Direct Sales Agents, also known as DSAs, are an essential part of the digital lending ecosystem. DSAs act as a bridge by connecting borrowers and lenders and provide assistance throughout the lending process.

While the digital revolution in India is witnessing an uptake, a large part of the population, especially those living in Tier 2 and Tier 3 cities, are comfortable with human assistance due to lack of digital literacy and scepticism for digital solutions.

New-age digital lenders are combining digital and human assistance by partnering with DSAs to expand their reach to the larger audience and educating them about the benefits of digital solutions like e-KYC, Video KYC etc. They are also training DSAs and upskilling them in new-age tools, making them future ready.

The government has given a massive push to the digital lending sector through the introduction of initiatives including the recent proposal of setting up a working group to ensure a safer digital lending ecosystem.

Digital lending innovation plays a major role in addressing the credit gap, especially among MSMEs and the population living in underbanked areas. Creating transparency in the digital lending landscape will provide a large part of the population access to formal banking and sources of credit, eliminating the informal players.

India’s digital lending sector has immense potential to transform the current state of credit starved population and drive financial inclusion through last mile connectivity. Digital lending players have barely scratched the surface and have a long way to go. With the help of new age technology clubbed with human assistance, we are on the right path to achieve our goal of digitally empowered Atmanirbhar Bharat.