Why are Digital-First lending products gaining momentum in the country?
The Indian economy is shaped by powerful forces and Fintech has played a key role in it. Fintech companies are leveraging sophisticated technologies to design new services for customers. With multi-service offerings accessible with a few swipes on the mobile phone, fintech companies have presented solutions to segments that were largely underserved.
Digital lending platforms have witnessed rapid adoption of their solutions by consumers, who have so far constituted the “invisible credit” segment. These lending solutions include the Buy Now Pay Later (BNPL) offering.
With a massive untapped and credit-hungry base, the digital lending industry is poised to grow from $110 billion in 2019 to $350 billion in 2023. Let’s examine the forces behind the huge expansion of this sector.
Digital Adoption: A Secular Change in Consumer Behavior
Covid-19 restrictions may have sparked digital adoption, but that trend is here to stay. Customers are rapidly turning to digital channels for all types of transactions. The increase in smartphone use and internet penetration in Tier I and Tier II cities means that digital channels are influencing a significant share of loan purchases. For example, 55% of individuals use online recommendations for credit products, and mobile is expected to influence approximately 7 in 10 personal lending transactions by 2022. Additionally, the population of new credit customers today is today diverse, with 49% of people under the age of 30, 24% being female borrowers, and 71% from non-Tier I cities.
This generation of digitally savvy loan seekers favors platforms that can automate the underwriting process to a large extent. The emergence of a digital ecosystem – enabling Aadhar-based e-KYC, CKYC, e-signature and e-mandate – has facilitated an end-to-end digital journey. Digital loan companies are using alternative data sources to underwrite digital loans for new to credit customers.
Thanks to the latest technologies, customer onboarding has become seamless and loan disbursement has become smooth and fast. Platforms can solve the credit problems of underserved segments with customized solutions. A robust security infrastructure further assures the highest levels of security to users throughout the lending process.
Faster access to personal loans helped households manage their finances in 2020 when income growth was weak. It is therefore not surprising that more than 60% of digital loans were disbursed by NBFCs in 2020, as revealed by an RBI report.
Moreover, the availability of such loans allows people to build their credit history and improve their credit score by making timely repayments. This makes it easier for them to apply for other forms of credit, such as home or auto loans, from major banks.
Buy Now Pay Later (BNPL): democratizing credit
Buy Now Pay Later (BNPL) provides a hassle-free shopping experience for customers. This solution, which seamlessly integrates with various e-commerce, travel, D2C and EdTech platforms, has gained momentum in India, a country where only 5 out of 100 people have a credit card. BNPL allows consumers to make small and large purchases on a rolling line of credit, which can be selected with a single click at checkout. Customers can then spread out payments in equal monthly installments, at zero or low interest rates.
E-commerce activity in India jumped 77% between 2020 and 2021, with India’s Tier II and Tier III cities seeing higher participation than ever before. More than a third of these consumers were between 26 and 35 years old. Much of this segment previously had no access to credit. BNPL has been a lifeline for millions of those Indian consumers whose purchasing power has been hit by the pandemic.
Driven by consumer demand, the BNPL market is expected to reach $45-50 billion in India by 2026, up from $3-3.5 billion in 2021.
Regulatory support fostering ecosystem growth
The Indian government’s focus on financial inclusion has resulted in regulatory support for lending platforms. To make the ecosystem safe and sustainable for borrowers, the RBI has recently proposed separate laws for digital lending. For example, verification of loan applications by a nodal agency and maintenance of a “negative list” of loan service providers are a few aspects that can keep bad players at bay.
Obstacles to inclusive and equitable credit growth have long hampered the country’s growth trajectory. The rise of regulated digital lending products in the country is a promising indicator of current and future economic growth.
The opinions expressed above are those of the author.
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