The Physical Push Digital Needs

Context: Rising trend of digital lending in India provides opportunity.

Factors leading to increased penetration of FinTech in India: 

• Change in consumer behaviour: due to experiences offered by Internet giants.
• Rapid technological advance: led by penetration of smartphones and proliferation of data; 
  • Supported by government initiatives like offline know your customer (OKYC), video-based KYC.
• Favourable regulatory environment.
• Changes in the operating models of lenders.

Benefits of increased digital lending:

• Market potential: According to PricewaterhouseCoopers, the market has grown at 42% in 2012-18 and is expected to grow from $75 billion in 2018 to $350 billion in 2023.
• Speedier approval of loans.
• Provide credit access to the underbanked and unbanked: As it uses alternative data, rather than traditional credit scores, to determine creditworthiness. 
• Drive financial inclusion: By increasing access to funds
  • India covers only a fifth of its 75 million poor who need financial assistance.
  • Only 10% of Micro, Small and Medium Enterprises (MSMEs) have access to formal credit.

Impediments for digital lending in India

• Fintech, as an industry, is loosely defined: payment platforms, lending platforms, insurance platforms and investment platforms, running on different business models, are treated similarly.
• Increased cost of borrowing: due to liquidity pressure for Non-Banking Financial Companies (NBFCs) and financial institutions triggered by Infrastructure Leasing & Financial Services crisis in 2018.
• Possibility of liquidity crisis:  Due to the inability of borrowers to repay loans during the Covid-19 crisis and the six-month moratorium provided on loans.

Way forward: for improving digital lending in India

• Take steps to aid the growth of the industry: like the Long-Term Repo Operation (LTRO) conducted by the Reserve Bank of India (RBI) that helped large NBFCs and financial institutions.
  • Provide special status to digital lending:  e.g. all loans less than Rs 100 crore shall be included in the priority sector lending.
• Digitalization measures: like consent-based access to data on platforms like Goods and Services Tax.
• Focus on financial literacy: e.g. basic financial planning should part of the high school curriculum, and under Corporate Social Responsibility, NBFCs could be asked to run a credit education program.