Tech-enabled alternative lending bridging the gaps in India's credit systems

Indian economy has been on an upward growth trajectory over the past few years and is now pegged at $2.6 trillion as per latest estimates from IMF. Accelerated penetration of internet and digitisation have been amongst the key drivers of this growth, with advancements in technology irretrievably transforming every industry including lending.

However, despite rapid advancements in digitisation, nearly 70 pc of the country’s population is still facing troubles in terms of easy Access to Finance. In the past, a significant part of this Access to Finance gap was attributable to reluctance of customers to transact digitally, inadequate infrastructure and legacy credit processes of financial institutions like banks and the non-banking financial corporations that have long dominated Indian lending space. However, today customer acceptance of digital transactions as well as the infrastructure to support such transactions are no longer a limiting factor.

The gap largely remains on the part of incumbent banks who have demonstrated slower than required pace of investment and commitment to adopt digital processes and systems.   In this backdrop,  multiple alternative tech-enabled lending models have emerging as key credit facilitators in terms of their abilities to identify truly creditworthy consumers using innovative tools and delivering credit digitally at lower cost with higher customer satisfaction.

India’s credit system and its historical problems

Traditional lending institutions and their modus operandi had many limitations as far as creating quick, real and easy access to credit is concerned. This was primarily because of their physical paper-driven processes as well as conservative policies when choosing a borrower largely an outcome of limited data availability. As a result of this, their focus continued to be on collateral-driven lending, with unsecured credit products offered only to the high income customer segments. This forced many borrowers to seek credit from unorganised lenders at high interest rates setting off a high cost debt trap cycle for low income salaried customers as well as small businesses. However, Indian borrowers with a limited credit history and little to offer as collateral, had no other choice but to borrow from unorganised lenders when looking for small personal or business loans. 

Technology and Digitisation are the enabler

 The lending landscape was set out for transformation, when technological advancements made it possible to address various pain points in the lending process, both for the borrowers and lenders. Today, lenders have the capability to pull out the credit report of the borrowers instantly, run complex algorithms and calculate a customer lending score in real time, allow the customers to upload their documents such as address proofs, identity proofs, bank statements directly on their platform as well as access alternative customer data from social media profiles and messages to do profile checks. Customers have the option to apply online, upload their information and documents digitally as well as track the status of their loan application on a continuous basis. Customer acceptability of digital financial transaction has moved up, thanks to demonetisation and other digitisation efforts of our regulators and government.

The upsurge of digital alternative lending

An enabling infrastructure and customer acceptance has led to the emergence of a variety of innovative lending platforms catering to retail consumers and business owners who were so far unable to secure credit from traditional banks. These platforms have shown promising results in easing off supply of credit to a large section of the country’s population. Some common features that distinguish these platforms from traditional banking approach are quick and digitally driven processes, unique credit appraisal approaches and flexible product structure to suit the income earning and repayment capacity of the borrowers. 

Some of the innovative models that have emerged in the alternative lending space to address the problems of credit shortage faced by India’s under-banked and underserved population are:

1. Digital marketplace lending model

A major deviation from the traditional banking archetype, marketplace lending model uses online platforms to connect consumers or businesses looking to borrow money with multiple lenders. The platform acts as a channel to allow customers to compare, shortlist and negotiate multiple lending offers before choosing the right offer. Digital platform like MyLoanCare.in connects the borrowers with suitable lenders to ensure that they get the right loan product, matching with their needs and credit profiles. While the loan processing is largely digital, it is still an assisted model where a dedicated loan advisor works with the customer throughout the loan journey to make the process smooth, transparent and hassle free.

2. Digital lenders using alternate scoring models

Another model that has emerged is the digital lending model, where the lenders cater to under-banked customer segments using innovative credit assessment and delivery models. These lenders cater to niche retail consumers and businesses and use a large set of evaluation parameters to assess the credit risk of borrowers where information about past credit history and other traditional risk parameters is limited. They access alternate data like social media records of the borrower, building detailed demographic profiles, reading SMS data and using advanced algorithms to filter out the right set of customers. Many of  the new age digital lenders make it mandatory for the borrowers to download and apply on their app platforms, which enables them to  assess and confirm many personal, financial and demographic details of the prospective borrowers.

3. P2P lending

One of the more recent additions to alternative lending models, P2P financing connects the borrowers directly with rich investors, thereby eliminating the involvement of intermediaries like banks or NBFCs. This reduces the time taken for credit disbursal. P2P lending companies reach out to their investors and borrowers, primarily through digital channels like the web or smartphone applications. This further eliminates the overhead costs required for setting up and maintaining a physical establishment. These benefits are then passed on to the borrowers in the form of improved chances of getting a quick loan at competitive rates.

Each of the above alternative lending platforms focus on making access to credit quick, seamless and widely available for customers. From the lenders perspective, they focus on reducing delivery time and costs, at the same minimising making the credit process stronger to manage credit risk and cater to a wider customer set.

Shifting base of offline lenders to online

It would be an understatement to say that online lending is taking over India’s financial and credit ecosystem and a majority of the credit for this revolution can be attributed to the country’s growing internet and smartphone penetration. No wonder then that even traditional offline lenders are now teaming up with alternative tech-driven lending platforms to extend credit to consumers. Considering their geographical limitations, offline lenders are typically limited to consumers in their vicinity. However, by joining hands with alternative lending platforms, they can now enhance their target market and also process more loans, faster, thanks to the quick credit check processes followed by new-age platforms. With all of the information at their disposal, it becomes easy for the lenders to scale their business. 

A promising future awaits if…..

As per industry estimates, the alternative lending sector in India has registered massive growth of around 106.4% year-on-year between 2016 and 2018 and its value is now pegged at $241 million. Yet, this can be called just the tip of the iceberg and there’s a lot more opportunity ahead for the domain at large. While constant innovation will be at the core of the growth of this industry, strong partnerships with legacy institutions, government bodies as well as favourable policies will also be pivotal in accelerating the momentum. The ultimate goal of economic mobility and financial inclusion will be possible once this sector receives the necessary push for enhancing reach and viability and entering its next level of evolution. 

By Gaurav Gupta, Co-founder and CEO, MyLoanCare.in