By Karthikeyan Krishnaswamy, Chief Technology Officer, KreditBee
India’s lending industry is rapidly transforming due to digitization, with complex and time-consuming loan application processes of yesteryears being upgraded to offer a faster, more secure, and seamless borrowing experience to keep up with changing customer expectations. Both traditional FIs like banks and new-age fintech players are riding the digitization wave to offer compelling low-cost, digital lending solutions.
Digitization of traditional lending predates the Covid-19 pandemic, which has increased the preference for digital lending over in-person interactions among borrowers due to hygiene, convenience, and peace of mind. The post-pandemic world will see a greater demand for online credit.
At the core of this digital lending boom is technology, playing a pivotal role in revolutionizing India’s credit ecosystem by creating alternative lending channels that offer significant advantages to both lenders and borrowers. Lenders enjoy the benefits of low operational costs, improved risk assessment, access to new markets, revenue growth, better customer experiences, and increased customer loyalty. Borrowers can enjoy near-instant credit with reduced paperwork.
But the most significant benefit of digital lending is helping traditionally unserved and underserved customer segments access affordable credit.
Digital Lending: Promoter of Financial Inclusion
Individuals part of the formal financial ecosystem benefit from existing credit history, but those lacking adequate credit history struggle to avail low-cost credit. From first-time borrowers like young millennials and Gen-Z to borrowers from low-income backgrounds and/or unbanked/underbanked areas, access to financing is a major challenge. For MSMEs and entrepreneurs with insufficient collaterals and lack of documentation, securing formal loans becomes a harrowing experience and an impediment in their growth. Conventional lending channels require formal documents such as credit score, bank statements, tax returns for credit risk assessment, and loan disbursal. In the absence of documentation, they either provide credit at very high interest rates or require adequate collateral, putting fledgling businesses at a disadvantage. To serve these customers, lenders must look beyond standard documentation and consider their digital footprints.
Technology: A Game-Changer in Digital Lending
Technology can help overcome these challenges and level the playing field for micro-borrowers – individuals and MSMEs. Digital lending creates seamless customer on-boarding and credit disbursement processes with tech-enabled, mobile-friendly platforms that can replace physical interactions with remote loan applications.
With AI/ML models, big data analytics, lenders can study online behavioral patterns and other digital data of potential borrowers for a more comprehensive risk assessment. This helps lenders de-risk their loan portfolio and reduce NPAs. Even traditionally risk-averse lenders have either started building their own digital lending platforms or partnering with fintech players to roll out best-in-class services.
While embracing digitization, lenders must understand that digital lending isn’t limited to just the credit application process. It involves digitizing the entire end-to-end process – from loan application, underwriting, disbursal, to repayment.
Various tech-enabled services help automate the processes, making it more secure and efficient. Video KYC facilitates a paperless, inexpensive solution for remote customer on-boarding – essential for a future where more and more customers will prefer contactless services. e-Sign can further help lenders acquire customer signatures on essential documents in a completely contactless manner through digital platforms/apps.
Mature technologies like face match, liveness detection, and more help improve fraud detection and borrower authentication, making the digital KYC verification processes more robust. Optical character recognition (OCR) technology helps APIs scan and read identity documents like Aadhar, PAN card and extract data digitally, reducing the probability of human error and saving time. A continuous focus is required to enhance these technologies with improved models to increase accuracy and speed of processes. Additionally, judicious investments in emerging voice technologies like call center automation can help lenders reap dividends later by ensuring greater customer satisfaction and retention.
eNACH (Electronic National Automated Clearing House), a system introduced by the NPCI, helps lenders automatically receive recurring payments from borrowers, faster and without requiring paperwork and manual interventions. This digitizes loan repayment processes and further reduces operational costs. New-age entities Digitap.ai leverage AI & ML technologies to provide these services and create a better lending infrastructure.
Geography is increasingly becoming less of a hindrance as borrowers can receive capital right at their fingertips, from the comforts of their homes without arduous paperwork, long waiting hours, and uncertainties.
Even though lending digitization is happening at an unprecedented pace, we’ve barely scratched the surface. Technologies like Blockchain, better AI/ML models, and cloud infrastructure can help FIs unlock unlimited possibilities. For example, lenders can harness blockchain’s power to create a decentralized P2P lending ecosystem where they can interact directly with borrowers without needing an intermediary. Blockchain can help create a more robust borrower risk profiling and fraud detection mechanism and reduce dependence on physical documentation by efficiently digitizing record-keeping. By adopting blockchain marketing, lenders can reduce ad frauds and serve better-targeted ads to the right customers. Result? More trust and transparency, better lending compliances, better risk management, lower risk of NPAs, reduced marketing expenses and enhanced customer experience.
With technology adoption, incumbent FIs and fintech players can create a truly future-ready lending model that empowers India’s digital economy and promotes financial inclusion.
