Digital lending: a bridge to financial inclusion

Digital lending is primarily preferred by those who are generally unable to obtain credit through formal sources of finance, such as banks.

Digital lending is a powerful tool that can be used for financial inclusion. With new innovations taking place, digital loans have enabled many financial service providers to deliver much better products to the masses at a much faster and even more cost effective rate. Digital lending can prove to be an influencing tool towards the growth of better quality financial services for businesses and underserved people.

India has huge growth potential when it comes to the digital lending landscape. Financial inclusion has been one of the main goals that the Indian government wants to achieve through its new initiatives. Looking at the data, we can see that Indian household debt was only 11% in 2017-18, while in China and the United States it was 49% and 78% respectively, this which shows that there remains a huge underutilized potential for digital lending in the country. This could only be achieved by making the tools to increase financial inclusion available to the general public.

What is digital loan?

Many believe that FinTech is one of the main forces that could remove the barrier of low financial inclusion. The banking, financial services and insurance industry has gained ground in recent years and has revolutionized the system for obtaining and disbursing loans through FinTech. The growth of digital lending has been phenomenal and this growth has also boosted digital lending. A 2016 report from KPMG found that alternative finance globally had grown into a $ 145 billion industry, growing 264% in just one year, between 2014 and 2015.

Digital loan is the process of obtaining credit online. Its growing popularity among new age lenders can be attributed to the increasing penetration of smartphones, the flexibility of the credit range and the speed of online transactions.

FinTech companies analyze digital payments data to efficiently underwrite in near real time. This results in all real-time internet transactions being replaced by fintech’s credit-based payment products, such as Buy Now Pay Later (BNPL) or Convert to EMI Products. These companies use their clients’ financial and transactional data to take out digital loans using an API-based approach, dramatically reducing the time it takes to get personal or payday loans.

Thus, online loans have played a central role in avoiding the cumbersome bureaucracy typically involved in providing offline loans in a traditional setting.

Why do MSMEs prefer digital loans over traditional loans?

Digital lending is primarily preferred by those who are generally unable to obtain credit through formal sources of finance, such as banks. One of the main examples is the increase in the growth of adoption by micro and small management enterprises (MSMEs). Online lending platforms gained popularity among MSMEs after Covid as they were unable to secure funding through traditional lending institutions and therefore had to turn to digital lending. The fast turnaround and integration, easy KYC, as well as disbursement within minutes attracted cash-strapped MSMEs to these digital routes to secure credit.

Lack of regulation leading to lack of confidence

There are many shortcomings in this digital lending model as in any new business transaction. There have been many instances of unscrupulous activity that have been noticed, especially during the pandemic where unauthorized lenders have extended credit to customers without any collateral and at exorbitant rates coupled with unrealistic timeframes to repay these. huge debts. As a result, borrowers were forced by lenders to remember when they were unable to repay these debts. Cases like these affect consumer confidence and end up hurting the growth of FinTech companies.

Also, in light of this, the Digital Lending Association of India has issued guidelines against such illegal activities by unauthorized digital lending apps. There is a growing need for regulation in this space where unauthorized players as noted above will continue to appear. Strict provisions must be formulated which can be legally enforceable. Regulation must be quickly enforced in this industry to ensure that consumer confidence remains unimpeded.

(By Nitin Mathur, CEO, Tavaga Advisory Services)

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