Everybody experiences a financial crisis, whether it’s individuals or institutions. According to WBG-Intellecap estimates, India’s addressable credit demand for MSMEs was INR 36.7 trillion in 2017. However, this demand is still not being met by the total supply of formal lenders at INR 10.9 trillion.
According to demand and supply estimates, banks as well as traditional financial institutions are not able to fill a huge credit gap of INR 25.8 trillion. The lack of proper documentation and credit history is one of the greatest barriers to supply.
Benefitting the Underbanked and Unbanked
This scenario creates opportunities for new-age NBFCs and digital lending players to expand. Digital lending platforms are eager to fill this gap as traditional lenders and banks don’t want to serve people without proper credit histories.
Despite all the Government of India’s efforts to ensure that financial services are available to everyone in India through the Pradhan Mantri Jan Dhan Yojana and Pradhan Mantri MUDRA Yojana , millions of people and businesses remain out of reach of the formal banking system. The reluctance by traditional lenders to lend to those with poor credit or no credit history has been one of the greatest obstacles to credit access. No matter if a loan applicant is salaried or self employed, they cannot get loans in a financial emergency. They were forced to borrow money from their friends and family or fall prey to loan sharks in order to meet their financial needs.
New-age fintech companies are using tech tools and techniques to provide their services to unbanked and underserved populations. They solve financial problems through seamless, fast, affordable, and convenient lending options. They have helped transform the lending industry from a physical domain to a hybrid model, which includes both digital and traditional modes of banking and makes use of both financial as well as non-financial data points in credit underwriting.
Digital lending companies are now benefiting from tailwinds that have accelerated adoption of digital deals by the masses. This has overcome their initial resistance. Demonetisation, GST and social distancing rules were key factors in the push towards digital.
These factors made it possible for lenders of new age to expand their reach in India. India’s digital lending market is expected to grow to $350 Billion in 2023, from $110 Billion in 2019. Instant personal loans are one of the most popular offerings by digital lenders. This eliminates the obstacles that borrowers face when applying for credit. Fintech firms make it possible for cash-strapped people and businesses to get small- or large-ticket loans as well as financing.
An Array of Digital Tools Advantages
Digital tools have revolutionized the way that emergency finance is procured. From the initial loan application through the due diligence and approval process, to disbursal of funds, processing, approval, and disbursal, digital tools make it easy. This seamless process can be made easier by using non-conventional credit data as an alternative method of conducting due diligence. You can use this data to determine the creditworthiness of the prospective borrower, such as past credit history, purchases patterns, and social media mining. All of these factors can be used to determine the creditworthiness and ability of prospective borrowers. Digital risk assessment methods eliminate the need to provide physical documentation. This simplifies and streamlines the underwriting process.
Advanced tech tools that make use of artificial intelligence, machinelearning, big data analytics and machine learning help to improve collection rates and reduce delinquency once loans have been disbursed. Customers are reminded by SMS and email every so often to ensure that they have enough funds in their bank accounts before the due date. Therefore, EMI bounce rate are very low. The use of third-party data, analysis of the digital trail and other operational costs by new age lenders can also reduce the cost of operations. Traditional lenders have additional expenses in this area.
These loans are granted to people without credit histories. This not only provides immediate relief in a financial crisis, but also builds credit history for first-time borrowers. This allows them to be eligible for longer-term, large-ticket loans in the future.
Digital lenders are not directly competing with banks, but complement them by providing credit to people who aren’t eligible for loans from legacy lenders. This is particularly true for small-ticket, short-term loans that banks do not typically offer.
Personal or business financing is possible. Instant loans are available for a variety of purposes, including working capital for businesses or personal expenses such as renovating a home, buying a car, paying for education, and purchasing property. Instant personal loans are especially useful in situations of emergency or other financial crisis when funds are needed quickly. These loans could be approved and disbursed within hours.
Digital lenders enable faster financial inclusion in India by providing instant loans approvals and flexible tenures via fully digital transactions in both crisis and non-crisis scenarios.