The use of advanced analytics coupled with partnerships with the tech service providers will enable the non-banks to have a meaningful play in the overall digital lending space
In the recent years, India has grown its own digital infrastructure which has revolutionised the financial system and has freed the lending processes from various inefficiencies. The entry of Technology Service Providers (TSPs) into the financial sector is creating a larger universe for the ecosystem. Banks have been increasingly adopting innovative approaches in digital processes and NBFCs have been at the forefront of partnered digital lending. India’s vision towards becoming a cash-light economy combined with the growth of public digital infrastructure and the demand for financial inclusiveness, makes it a front runner in the digital lending technology arena. The digital public infrastructure created by India is amongst the best in the world.
1. Account Aggregator (AA) – AAs are RBI-licensed entities that facilitate structured financial data sharing from FIPs (Financial Information Providers – IRDAI, PFRDA, and GST) to FIUs (Financial Information Users – Banks and NBFCs). The number of accounts linked with AA has grown from 72,000 at the start of 2022 to 33,00,000 at the end of the year, this is 46 times jump in just a year as per data from sahamati.org.in.
2. India Stack – It is a unified software platform that makes lending operations presence-less, paperless, and cashless. The use of Aadhar for KYC, NPCI platform to transfer funds seamlessly are all enablers for digital lending.
NBFCs are using micro services to authenticate and validate data shared by borrowers. For instance, APIs (Application Programming Interface) call on NSDL for Pan Validation, CKYC for the borrowers and the entity, video PD and ability to e-stamp and e-sign the loan documents. Payment Gateways – electronic National Automated Clearing House (e-NACH), the Unified Payment Interface (UPI), and the Immediate Payment Service (IMPS) developed under National Payments Corporation of India (NPCI) facilitates a fast and portable fund transfer system.
The democratisation of credit by enabling the use of above-mentioned technologies has allowed millions of businesses to get finance and contribute to the growing economy of the nation.
Along with the development of the digital infrastructure, there are other factors as well that have led to this massive spread of acceptance.
1. Smartphones – The number of smartphones in India have increased from 100 million in 2014 to over 700 million in 2021 which led to the internet access to most Indians. This gives users, especially those who need urgent small-ticket loans, the option to download lending apps and avail loans without waiting for a long time.
2. Favourable Regulations – India’s objective to increase financial inclusion and digitisation has led to the implementation of flexible regulations which ensure that unauthorised digital lenders are weeded out without affecting the growth of legitimate lenders.
India’s growing digital lending ecosystem
In 2020, lending through digital mode relative to physical mode was still at a nascent stage in case of banks (₹1.12 lakh crore via digital mode vis-à-vis ₹53.08 lakh crore via physical mode), whereas for NBFCs, higher proportion of lending (₹0.23 lakh crore via digital mode vis-à-vis ₹1.93 lakh crore via physical mode) was happening through digital mode. NBFCs have made great strides in lending through digital mode. Overall volume of disbursement through digital mode for all the entities namely, public sector banks, private sector banks, foreign banks and the NBFCs, has exhibited a growth of more than twelve-fold between 2017 and 2020 (from ₹11,671 crore to ₹1,41,821 crore) as per data shared in “Report on Digital lending by RBI”
CEO, Edelweiss Retail Finance
Way forward
It can be unambiguously stated that digital lending will continue to gain acceptance in consumer financing and small ticket lending. Retail and MSME borrowers will see faster sanctions by financial institutions via consent-based usage of GST and bank statement review. NBFCs are also stepping up play in embedded finance journeys for ‘point of sale’ financing like ‘Buy Now, Pay Later’ or financing partner to vendors who sell on an e-commerce platform and more. The use of advanced analytics coupled with partnerships with the tech service providers will enable the non-banks to have a meaningful play in the overall digital lending space.
