Digital lending apps are known for providing easy and quick loans without much hassles, but are in news recently for all the wrong reasons like excessive service charges, high interests, defaming defaulters etc.
However, not all such digital platforms are user unfriendly and they provide the borrowers opportunities to either improve their credit score by making timely repayments or to worsen the score by taking small loans casually and ignoring the repayment schedule.
“For as long as one can remember, lending has always been transacted in person, wherein moneylenders provide borrowers money in exchange for interest. Over the years, moneylenders were outrivalled by banks and financial institutions and now, banks are being eclipsed by NBFCs and FinTech. As digitalisation matures in scope and intent, it is also making strides in the lending landscape. Considering the accelerated adoption of FinTech revolution during the pandemic, digital lending has become the today and tomorrow of lending,” said Ajay Chaurasia – Vice President: Marketing, Product & Business, RupeeRedee.
“The pandemic necessitated financial emergencies and limited access to banks and financial institutions shifting Indian customers to digital lenders in their hour of need. According to Fintech Association for Consumer Empowerment (FACE), fintech lending companies doubled digital lending in the FY 2021-22, disbursing a total of 2.66 crore loans worth Rs 18,000 crores. At the same time, RBI identified over 600 illegal lending apps in 2021, more than half of the total lending apps in India. This clearly states a multitude of factors is driving the FinTech growth,” he added.
Chaurasia lists the benefits of the fintech and the challenges it faces:
Instant loan disbursal
Digitalising the entire loan disbursal process, from loan application to credit assessment, has helped digital lenders to reduce turnaround time. Additionally, collaboration in the financial ecosystem to avail real-time KYC has significantly reduced the time lost in customer authentication. Digital lenders evaluate credit worthiness using technologies such as artificial intelligence (AI), data analytics etc. which helps them to offer accurate loan amounts instantly. As a result, customers in dire need of finance can turn to digital lenders for their quick turnaround time, 100 per cent digital process and sachet loans.
Greater accessibility & inclusion
Customers are often excluded from the formal ambit of financial services due to lack of collateral, decent credit score or being new to credit. As a result, MSMEs, rural populace and low-income groups fall prey to informal moneylenders and loan sharks. New-age fintech companies are bridging this credit gap for underserved and un-bankable populations by building a robust digital lending ecosystem. Digital lenders compute credit worthiness by assessing customers’ digital footprint, current financial standing, historic behaviour etc., not just the credit score. Additionally, the use of automation and AI for the review of documents, creditworthiness etc., irons out biases from the application process.
Frictionless customer experience
Digital lending apps are built to simplify the time-consuming and inaccessible lending process as it once used to be. Under the conventional lending process, loan applicants would visit the bank several times and wait for months to hear the bank’s credit decision. With online lending platforms, the route to obtaining loans has been cut short, made much more comfortable and less stressful. Now, customers can get loans directly into their bank accounts from the comfort of their homes within a few hours of applying. As a result, lending has become frictionless, accessible and inclusive.
Key challenges affecting accessibility
While the speed and ease of access to digital lending are a blessing for customers, they can also instigate financially harmful consumer behaviour. As loans become accessible with the click of a few buttons, digital lending triggers reckless activities such as impulsive borrowing and spending. Easy access to credit may induce customers to waste money or exhaust the loan irresponsibly. Additionally, digital access to credit also increases the instances of borrowing among consumers. The use of personal devices, a sense of anonymity and privacy reinforces secretive behaviour that may prove to be financially and emotionally harmful in the long run.
Apart from this, over the years, the exponential growth of digital lenders has resulted in growing incidents of illegal entities deceiving innocent customers in need of small loans. These entities charge exorbitant interest rates, harass customers upon delay or non-payment of loans and misuse customer data. These illegal entities are not registered as banking or non-banking finance companies and are far from regulation. The heavy job losses and financial emergencies during the pandemic drove several customers to illegal digital lenders, resulting in irrevocable damage to credit scores and lives.
There is no denying that the benefits of digital lending far outweigh the banes. Going forward, digital lending can become the new norm of credit disbursal to the underserved sections of society, provided they are closely regulated and consumers practice prudence. Underpinned by the government, regulated by the RBI and embraced by the customers, digital lending can pave the way to financial inclusion for even the bottom of the pyramid.