Digitalization has arrived in lending and is here to stay. About half of retail and MSME loans offered by banks will shift to digital lending platforms in the coming 2-3 years, according to Managing Director and CEO of Union Bank of India Rajkiran Rai G.
Rai said that digital lending is changing the banking landscape in a big way because of the availability of data and many ecosystem partners collaborating with banks.
What is Digital Lending?
A major roadblock to the success of any MSME is ease of getting funds. There are approximately 6.3 crore Micro, Small and Medium Enterprises in India and about 40% of the credit demand of these small businesses is still met by informal sources of credit.
This under-served market holds big prospects for digital lenders and other institutional lenders of MSMEs. As the economy moves towards rapid digitization, digital lending is expected to see unprecedented growth to bring disruption and innovation in credit and payment services.
- Digital Lending is a practice of lending funds through web platforms or mobile apps by using technology for authentication and credit assessment.
- Digital lending aims to improve and automate the lending process, bringing in a multitude of benefits for banks and other financial institutions such as increasing revenue per loan, improving productivity and better customer services.
- Digital Lending allows borrowers to apply for loans from any internet enabled device from anywhere in the world.
- The Digital Lending market in India has grown from USD 33 billion in FY15 to USD 150 billion in FY20. The market is expected to see a continued rise and may touch USD 350 billion by FY23.
Why is Digital Lending needed?
- Small entrepreneurs and sole proprietors find it difficult to source affordable formal credit for the growth of their businesses. The cost of lending to these groups is high due to which they are often excluded from mainstream lending channels.
- Banks rely on data such as bank account statements, cash flow analysis and past earnings to determine loan eligibility and help in credit risk profiling and pricing of loans. These historical data are often not available for small businesses.
- Fintech platforms for Digital Lending are focusing on closing this gap and have significantly changed the way MSMEs avail of credit.
- Fintech companies provide an alternative method of risk analysis which takes into account factors such as spending patterns, online behaviour, consumption trends and standardized GST linked data.
- These platforms also have lower customer acquisition and loan processing costs and have digitized the complete experience of loan journey from customer onboarding and KYC to loan processing and disbursement.
Benefits of Digital Lending
- It bridges the gap between lending platforms and unmet credit needs of MSMEs, thus helping in creating a more financial inclusive economy.
- Digital lending reduces dependence on informal sources of credit which usually have a very high rate of interest and other unreasonable terms.
- Lending through digital channels helps in saving precious time working on loan applications manually and even reduce overhead costs by 30-50%.
The Way Forward
While speaking at the Sibos 2021, an annual banking and finance conference, Union Bank MD said that the digital lending space is gaining traction and banks need to develop products that can deliver services online to customers. Rai said that he sees a big revolution in MSME lending going forward.
"The working capital lending to MSME will move from open credit like working capitals and cash credits, to very-targeted lending such as very specific invoice discounting and supply bill discounting," he said.
Talking about the relationship between fintech and banking, he said that initially it was thought that fintech will compete with banks, but now the relationship between the two has become more symbiotic. There are many products where fintechs are already working with banks, he added.
Rai believes banks need to continuously invest in technology and upgrade themselves. Talking about Government-owned banks, he said that public sector banks need to get new talent from the system who are adept in technology and can bring in innovations.
The surge in adoption of digital lending platforms among small businesses post the pandemic has advanced further even as traditional banking channels have remained a problem for many Indian MSMEs in need of credit. However, if India wishes to become a USD $5-trillion economy, then lending needs to be done at an extensive scale to make sure that small businesses, the backbone of the Indian economy, can prosper
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