5 Reasons Why The Digital Lending Explosion Is A Certainty

Recently, the finance minister talked about loans for micro, small and medium scale enterprises (MSMEs) on the basis of GST invoices they file. Interesting! This adds another type of loan to a long list of loan categories. Loans are an integral part of our lives. They could be personal loans, car loans, home loans, or working capital needs for our businesses. Historically, the entire loan process has been cumbersome and time-consuming. With economic growth, the traditional methods are simply not able to keep up.

Challenges with traditional loan process.

Traditional methods of taking loans involve a lot of paperwork along with manual scrutiny and intervention. Such methods are also exposed to human errors. This increases the turn-around-time (TAT) in disbursing loans.

Onboarding a borrower has been a complex process especially for collateralized loans. It involves lead management, application, documentation, underwriting, fraud checks, legal checks, valuation, decision, disbursal documentation before the final loan disbursement. The opportunities to disrupt this journey exists not only at each stage of the loan origination journey but also from the time the customer begins to think about the need for a loan.

For a country like India, traditional methods simply cannot scale to meet the economic needs of scale.

Is digital lending the solution?

As the name suggests, digital lending is the digitalization of the entire loan process. You apply for loan digitally, the processing and storing of information, approvals, the decision to disburse and actual disbursement, all happens digitally.

According to a study done by Oxford Economics in 2018, the adoption of a flexible and scalable platform and a decoupled technology architecture could result in raising loan volumes by 15 to 20 percent while reducing operational costs by 20 percent. Wow!

These are obvious reasons why Banks and NBFC’s are trying to move on to these platforms for increased profit margins. To survive and thrive, they need to make and sustain customer-centric digital experiences at scale and speed. According to estimates, the lending platform business is projected to disburse up to $5 Trillion of loans in the next 5 years. That is a huge volume.

Why is this explosion a certainty?

Let’s not make a mistake. Digital lending solutions have been around but have not gotten its due. As a practitioner in this space for many years, I see a few key factors getting aligned. This makes me believe that we are sitting at the cusp of the revolution. Let’s look at them.

1. Maturity of the ecosystem and availability of data.
The ecosystem exists that has data of individuals, their financial track records and substitutes to estimate their creditworthiness with different sources such as CIBIL and BUREAU.  The includes but not limited to following.

  • Identity proof and verification
  • Financial history
  • CIBIL score
  • Existing and past loans
  • Fraud history

There are also some secondary sources to know a person’s financial health and ability to repay.

2. Big Data and Artificial Intelligence (AI)
To make use of this data, one needs the ability to process such large volumes of data and generate insights out of them. In today’s data economy, big data technologies can handle large volumes of data. More importantly, using this data, Machine Learning models can predict the creditworthiness of an individual or an organization.

3. Mobile and internet proliferation.
Depth of internet penetration at good speeds and mobility, even in rural areas, is helping the business reach out to more customers as people who use the internet more frequently are increasing day-by-day. The government through regulations is encouraging more digital payments. This is making people more and more technology aware.

4. Technological advancements.
As you can see from the diagram below, multiple technologies come together to make a digital lending platform work. Right from sales management & credit approvals to management of financial business flows and operations. We, at GS Lab, have developed or leveraged products/accelerators to develop lending solutions.

5. COVID-19, an accelerator.
When SARS happened, eCommerce boomed. COVID-19 is expected to fuel growth in digital lending. People are forced to move the digital route. Indian Government has recently launched video-based KYC authorization. Now, one doesn’t need to visit a bank or an insurer to complete the loan application process.

Conclusion

In nutshell, the stars are aligned. The ecosystem is ready. The sector has a motivation for growth and efficiency to adopt digital lending. The government is encouraging everyone to adopt digital ways. The end user’s habits are changing. People are happy to avoid visits and long processes. Technology can do the harder part of not only simplifying the processes but also a harder part of decision making. Loans are an integral part of the banking segment as well as people and businesses. Digital lending has been around. Now, you know I believe why digital lending is going to explode and become a new normal.

Hemant Pande | GS Lab
Author
Hemant Pande | Lead Software Engineer

Hemant works as a lead software engineer at GS Lab and has over 10+ years of experience working with the Fintech industry. Hemant has delivered multiple projects across various Fintech products. His primary interest is with scalable distributed systems and loves to develop maintainable systems. He is also the organizer of multiple meet-ups on various technologies at GS Lab.