Thanks to India’s e-commerce boom, consumers have started to expect a lot more from the other service providers they routinely buy from. The lending industry has learned quickly from the unequivocal shift towards digital. This change has been driven by both consumer demand and regulatory factors.
The first wave of change came in the form of web portals that brought the whole range of loans – personal, two-wheelers, four-wheeler or home – to the customer’s desktop. Now, app-based loans from a host of small finance and private lenders are available ‘on tap’. There is practically no customer touchpoint that isn’t impacted by the digital lending revolution today. Unsurprisingly, it also has a strong social dimension: financial inclusion and low cost borrowing.
The market for digital lending services is expected to grow to $100 billion by 2023, even as demand in the consumer finance segments remains lukewarm for the foreseeable future.
The overall pie is expected to a whopping $1 trillion by 2025. Fintech companies and private lenders are bullish on long term growth prospects because of the raft of investment deals that the sector has garnered over the years.
The ability of digital technology platforms to objectively qualify and target market segments such as small retailers, housing societies, nonprofits and even religious organisations is a competitive advantage that ever lender wants to harness. Lenders are also eyeing new market segments to sustain growth as demand tapers off in their traditional markets.
For example, Small and Medium Businesses (SMEs) are also being aggressively wooed by lenders as up to 49% of the sector is still largely unbanked, according to Instamojo.
Demonetization was a watershed moment for the Indian lending sector. It brought a number of non-bank players from the fringes to the centre of the playing field.
Case in point: Digital wallets morphing into payments banks and going on to offer banking services to low-income groups.
Financial services aggregators have made bargain hunting for loans simple and intuitive.
Trends that will transform the Lending Sector in India into an Enabler of Growth for B2C and B2B Customers
The contentious issue of data protection once addressed, is expected to unlock a wealth of consumer data for the financial services sector. The Personal Data Protection Bill, which is expected to be tabled in Parliament in 2020, will provide ‘accountable and transparent’ financial services to India’s 1.3 billion consumers.
Predictive data modelling for risk management and debt recovery is expected to become much more realistic and enable lenders to tap market segments that are underserved.
Traditional lenders like large multi-state public sector banks are increasingly opting to invest in digital lending start-ups and leapfrog competitors who are ahead of the curve in terms of on-demand loans. Private lenders like P2P platforms, on the other hand, are looking to build on their lead by focussing on agile workflows and flexible products with faster approval rates.
Reporting and analytics
From a risk management, legal compliance and recovery standpoint, lenders are leveraging AI and analytics on a wider scale to identify loopholes and take effective countermeasures.
Data-driven insights can help lenders avoid expensive lawsuits and fraud. On the cybersecurity front, lenders increasingly rely on digital tools to ‘fingerprint’ and foil hackers.
Across the customer journey, digitisation will make lending more intuitive and responsive, from lead qualification to loan finalisation and beyond. Lenders are leveraging digital platforms to capture customer data, collect processing fees, issue sanction letter and get documents like NOC digitally signed by customers. In the time to come, credit decisions will be made almost instantly, thanks to automated CIBIL verification and Aadhaar-linked PAN and bank account data.
Advanced algorithms in loan management tools like Finezza already make it possible for lenders to reduce turn-around times across the loan cycle, rationalise operating expenses and improve customer satisfaction rates. In the next decade, self-learning systems will make personalised customer experiences much more interactive.
As lenders aim to boost profits, the focus on right-sizing teams across different functions will only increase. Digitised processes such as e-KYC and integrated credit monitoring have the potential to drastically reduce the need for ‘feet on the street’ to provide last mile connectivity with customers. Staffing requirements in departments such as document analysis and customer service will also see cutbacks. Increased outsourcing to niche players specialising in data aggregation and market research will increase returns on investment.
By extension, underwriting teams will be able to make more objective and justifiable lending decisions based on a wealth of customer data. This will lower risk exposure and help lending companies comply with regulations more effectively. Last year, the RBIs banking ombudsman received 1.96 lakh complaints regarding unfair lending practices, a 20% increase over the previous year.
On the other hand, it imposed fines on several lending firms for not meeting compliance guidelines. Digitised processes will help banks develop new lending strategies that balance risk and compliance with profitability.
Small business finance
Taking a cue from government finance schemes like MUDRA, lenders are now viewing the small and medium business sector with renewed interest. Sticking points like lack of collateral and banking history are being done away with as lenders tap into consumption data for services like online shopping, entertainment and payments to. By analysing historical financial data, small business customers can get affordable loans customised to their needs.
Big data analytics will also allow Micro Finance Institutions (MFIs) to protect their margins as competition in the segment continues to grow. Low loan default rates, especially among women entrepreneurs and cashless collections will increase the pace of economic empowerment of low-income groups, thanks to FinTech.
With online lending marketplaces starting to gain traction in the Indian milieu, the need for robust benchmarking practices assumes importance. To compete more effectively, lenders need to anticipate emerging demand and create products that will be relevant to new markets. With Big Data, NBFCs will be able to develop a roadmap for the future that will be uniquely suited to the opportunities and challenges that they expect to face. From a risk mitigation perspective, data-driven benchmarking will affect the entire product lifecycle for lenders, from end to end.
Consumer credit data is heavily regulated and unauthorised access is an offence punishable by law. Subject to RBI approval, lenders will soon develop a common framework for assessing credit information in conjunction with FinTechs and startups. This move is expected to enable the smooth flow of data via secure networks with adequate oversight to ensure compliance with data privacy laws. Technology companies are working on API interoperability between their platforms to enable seamless credit monitoring and risk analysis, which will drastically reduce the amount of time taken to process loan applications.
The lending landscape in India is on the cusp of change. The buzzwords across the industry today are paperless, cashless and customer-centric. Loan automation tools like Finezza help NBFCs deliver best-in-class services to customers in a streamlined, cost-effective manner. Contact us today for more information.