It was not too long ago when digital lending simply referred to a superficial layer of app-enabled applications that allowed prospective borrowers to begin the process of acquiring credit but had to contend with the old machinery of back-office underwriting based on traditional bureau scores to actually get the loan sanctioned. Key events such as smartphone penetration, demonetization, the introduction of India's digital tech stack like UPI, and then finally the dreaded COVID-19 pandemic have all contributed to the rise and rise of digital lending.
Thanks to the rate at which technology has penetrated India’s financial sector, certain trends, which would have otherwise taken years to pan out, have been expedited. From changes in strategic imperatives amongst lenders to RBI-led incentives, these are the trends in the digital lending space that are directing the future of finance in India.
Account aggregators
The introduction of the Account Aggregator framework by the RBI is considered to be one of the major catalysts in the Indian financial system. By design, account aggregation is the path through which India will transition to an open banking system. Spearheaded by SEBI, the RBI, and other key institutions, the AA framework enables data sharing.
This is likely to iron out many of the inefficiencies that currently exist in capital allocation and is a precursor to a new, tech-driven age in Indian finance that is likely to bring about greater levels of wealth and prosperity to the Indian population in a more inclusive manner.
Blockchain tech
In a nation that has long been battling with fungible record-keeping systems, blockchain technology is nothing short of a godsend. Blockchain is a database technology that duplicates and distributes itself across a shared network of computer systems. This effectively makes it a bulletproof system of recording transactions as tampering with transaction-related data is all but impossible.
For India, this is a step towards solving the trust-deficit problem that continues to be a major barrier in Indian societies. As banks and NBFCs alike open up to adopting blockchain, the overall faith that people place in the Indian financial system and amongst each other) will result in better, smoother, and faster financial transactions using tokenized smart contracts.
Neo-banks
A decade ago, the concept of an app-only bank with no physical branches would have been written off as yet another short-lived fad by most people. Today, it is a reality that is gaining traction faster than ever. As internet penetration increases, and as more and more people are getting comfortable with handling transactions over their phones, the prospects of app-only ‘neo-banks’ are increasing.
Neo-banks, with their strong reliance on technology and their targeted acquisition of customers amongst younger demographics, is a sign of a wider movement that will eventually reach all sections of our society. With their slick user interfaces and robust technological capabilities, neo-banks are key to solving the problem of the low penetration of institutional finance in India.
Machine-driven underwriting
Traditionally, underwriting was performed by finance professionals who relied on their experience, intuition, and cold-hard analysis to take on financial risks. With the explosion of capital allocation opportunities, these underwriters began to be overworked, and inevitably began to lose out on opportunities that would they would have otherwise backed.
Today’s lenders are actively experimenting with AI and ML-driven underwriting models in order to lighten the load on their respective underwriting departments. While this practice has not yet become the norm, it will advance its position in the market by evidence of lenders who succeed by adopting such models.
Wider market focus
Ever since the Indian economy’s liberalization in the early 1990s, a lot of the ‘action’ amongst Indian financiers were concentrated in India’s Tier-1 and 2 cities, as they served as a proxy for financially sound investments. Unavoidably, this also meant the pool of opportunities that were available for lenders was rapidly declining.
With heavy broadband and smartphone penetration and the strong adoption of UPI across the country, lenders are beginning to divert their focus away from major cities and towards smaller districts and towns in an attempt to tap into the underbanked population.
Conclusion
These trends are currently only taking place within the burgeoning digital lending space in India, but their implications are far larger. The widespread adoption of these practices is likely to change the underlying behavioural design of the Indian population, and this impending change is going to bring about a complete overhaul of the Indian financial system in the years to come.
The author, V. Raman Kumar, is Founder Chairman at CASHe. The views expressed are personal
First Published: Jan 2, 2022 7:02 PM IST
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