Lending historically has been perceived as a corporeal transaction between a lender and a borrower, with the lender earning interest in exchange for lending his money. The business of lending has evolved with time. From being a disorganized sector of pawnbrokers lending money in exchange for collateral to now banks and financial institutions lending money in a structured manner, India’s lending industry has completely transformed & contributes immensely to the economy. Technology has been at the centre of the modern banking sector of India. The advancement started with the introduction of internet banking and online means of making payments. There has been a significant increase in the demand for virtual banking. Improved customer service & an ever-growing e-commerce market, in addition to the influx of fintech, have made digitization a synonym with the banking sector in India. The practice of lending was also digitized, thus, the concept of digital lending came into the market. Digital lending is the process of disbursement and recollection of applied loans through the means of digital channels. The use of artificial intelligence and data for the making of credit decisions and improving customer engagement has revolutionized the fintech market of India. With the incursion of the coronavirus, the digital lending business further boomed because of the near cessation of economic activity. Due to the advent of digital lending, the unbanked population in India could access credit facilities, and therefore, financial inclusion has been propelled. Over 190 million people in India do not have a bank account and only 10% of the population has access to organized credit facilities through banks. This created a lacuna in the lending market that was filed by digital lending. The total valuation of the digital lending market in FY 2015 was USD 33 billion. The growth has been so immense that the valuation is expected to reach up to USD 350 billion by FY 2023. By 2030 digital lending will alone account for 60% of the total fintech market of India. However, the market has its share of controversy as well. During the pandemic, complaints of unethical recovery practices and charging of high-interest rates against digital lenders started emerging. Furthermore, the Reserve Bank of India intervened and introduced regulations to organize this behemoth market.
DIGITAL LENDING FOR SMBs AND MSMEs
In India, the digital lending market has focused on 2 sectors. First are consumer loans and credit cards. As per a report by the ICICI bank, the size of consumer loans in India may touch the valuation of 1.3 trillion $ by FY24. The smaller Indian cities are at the helm of this demand. Furthermore, there has been a surge in the demand for payday loans due to the crunch in the liquidity of the market amidst the pandemic. The second is business loans for Small and Medium Businesses (SMBs). 87% of the total SMBs in India still do not have access to organized credit. Digital lending can change the scenario to achieve the pending credit demand of over 600 billion. The digital lending market has seen immense growth in the demand for credit from Medium Small and Micro Enterprises (MSMEs). Some segments in which growth has been recorded are P2P lending, Point of sale lending, invoice-based lending, crowdfunding, pay-later loans, supply chain financing and digital mortgage.
BUSINESS MODELS IN THE DIGITAL LENDING INDUSTRY
Lead Generation- Marketing channels are used to connect with prospective borrowers and their data is captured. Through various platforms, they are directed to lending websites. Paisabazzar and BankBazaar are examples of third-party marketing agencies.
- Online lenders- Lending businesses with only a digital customer base use artificial intelligence to reduce customer procurement costs and credit underwriting.
- Credit data model- Bureaus such as CIBIL, Equifax etc are used as the traditional data aggregators to determine creditworthiness. But the use of artificial intelligence is becoming more prominent which is done by banks and financial institutions to create credit profiles and determine creditworthiness.
- End to End lending- They are an amalgamation of the abovementioned models. An example of a full-stack lending platform is PayU which has merged its digital lending platforms lazy pay and pay sense.
Fintech is leading the digital lending market in India. An analysis done by the Boston Consultancy Group showed that of all new customer acquisitions, the India fintech accounts for 30%. Fintech is leading the digital lending industry with its enhanced digital capabilities.
THE RESERVE BANK OF INDIA ON DIGITAL LENDING
During the onset of the coronavirus, due to the slowdown in economic activity, a lot of people required instant loans. For such loans, a lot of mobile applications were available that provided instant loans without verification of documents. However, the catch turned out to be that these applications were charging exorbitant interest rates. These apps collected personal information such as contacts of the borrower. In case the borrower failed to repay the loan along with the interest, the recovery agents threatened the borrower with public humiliation. This practice resulted in numerous suicides as well. In the case of Dharanidhar Karimoji v Union of India, the Delhi High Court directed the Reserve Bank of India to set out regulations for digital lending applications. The RBI, in January 2021, constituted a working group to counter the grievances raised on digital lending. The report of the group suggested the formulation of a Self-Regulatory Organization (SRO) that covered all existing participants in the digital lending industry. The report called for separate legislation to prevent illegal digital lending. The report suggested that data collection of the borrowers be done only with their prior and explicit consent.
On September 2 2022, the RBI came up with guidelines to regulate digital lenders. As per the guidelines, three parties were specified to be involved in digital lending. These were Digital Lending Apps (DLAs), Lending Service Providers (LSPs) and Registered Entities (REs). All commercial and cooperative banks, along with the NBFCs were mentioned to be part of the REs. The functions of customer acquisition and recovery on behalf of REs are to be performed by the LSPs. The applications and websites owned by REs and LSPs to provide lending are mentioned as DLAs. This resulted in barring the fintech companies without a banking license from disbursing loans digitally. The guidelines directed the lenders to store minimal data of the borrower which is to be taken with the prior consent of the borrower. It directed that all the charges have to be stated beforehand. All lenders have to appoint a nodal grievance officer for consumer complaints. It specifically focused on consumer rights and mentioned that the loan amount has to be directly deposited into the account of the borrower by the lender. No involvement of a third party is permitted. Therefore, through the guidelines, the RBI ensured that the rights of the borrowers are protected and the corrupt practices of lenders are checked.
The digital lending market, now that it has been regulated, is capable of hosting the majority of the lending in the coming future. The growth of the fintech ecosystem has made lending its largest opportunity in India. The regulations were needed to boost the trust of the borrowers in digital lending applications. However, the regulations were silent on the subject of fake applications portraying genuine lenders. A mechanism has to be created to identify and restrict these fake applications. Furthermore, the Digital India Trust Agency, as recommended by the working group, must be set up by the RBI. The application without the verification of the agency should not be allowed to operate. By being more consumer-oriented the digital lending market can provide credit facilities to untapped potential borrowers in India.
Author(s) Name: Parth Sharma (S.S. Jain Subodh Law College, Jaipur)