India is a young and developing economy with a population of more than 1.4 billion people. Until the last decade, the country grappled with various challenges across multiple fronts, hindering its overall progress. While most of the problems still exist, we focus on one particular area that deserves the limelight and widespread appreciation: India’s push toward inclusive growth and development via digital lending.
More than 78% of the Indian population above 15 years had a bank account in 2021 against a modest 44% in 2011.
The combination of successful government initiatives, including the Pradhan Mantri Jan-Dhan Yojana (PMJDY) and the rapid internet penetration driven by an exponential rise in smartphone users, have enabled more than 330 million to enter the formal financial sector since 2014.
This article explores the impact of digital lending and its role in financial inclusion in India.
Digital Lending and Its Role in Empowering Indian MSMEs
With more than 13.8 billion registered micro and small enterprises (MSMEs) in India, it is safe to say that they are one of the most integral components of the Indian economy.
It is also worth noting that MSMEs contribute to one-third of the country’s gross domestic product (GDP) and around 50% of India’s exports while being the second-highest employment generator after agriculture.
One can only speculate and wonder why MSMEs were deprived of loans and other financial products by traditional banks and lenders for the longest time. Things have changed for the better in recent years as digital lending has made loans more accessible than ever before.
Role of Digital Lending: The Goal of a Robust MSME Sector
Here’s how digital lending is disrupting the once-forgotten and overlooked MSME sector today.
1. Government Initiatives and Startups Driving Change
The arrival of the Unified Payments Interface (UPI) in 2016, coupled with the transformative effects of the COVID-19 pandemic, has gradually ushered the cash-based Indian economy toward a digital one.
While UPI has played an important role in boosting the number of digital payments in India, the entry of innovative startups offering inclusive financial products has made credit more accessible to those who mainly relied on informal and unsecured lending channels.
The Goods and Services Tax (GST) was introduced in 2017 resulting in a 50% growth in the number of GST-registered MSMEs against the previous tax regime. This paradigm shift toward digital tax reporting created an invaluable database that contains verified and electronically accessible data.
2. Digital Lending Journeys Outshine Traditional Lending
It was a stupendous undertaking for women, MSMEs, less-educated business owners, out-of-labour individuals, and individuals below the poverty line to access credit through traditional lending channels.
Digital lending models provide significant advantages over traditional channels and have exhibited great promise in addressing the pitfalls of MSME credit-related challenges. One of the most notable benefits of digital lending is the shorter turnaround time for loan approvals.
While it could take between a few weeks and months to access credit, digital lending has trimmed that time to as short as one day, particularly for first-time borrowers.
3. Manual Tasks and Physical Branch Visits Take a Backseat
Digital lending models have not only simplified loan approval processes, but they have also eliminated the need to fill out manual forms and make in-branch visits for credit approval and disbursement.
Right from borrower verification, background checks, and credit bureau checks to digital loan agreements and disbursement, new lending models leverage customer data to make quick and informed decisions.
Additionally, the digital route provides a more accurate and systematic evaluation of a borrower’s creditworthiness, streamlining credit underwriting.
4. MSMES and First-time Borrowers Embrace Digital Lending
Over 5 million Indian MSMEs have access to formal credit, and this number is expected to grow further in the upcoming years as more and more MSMEs embrace digital lending. Additionally, small business owners are becoming increasingly comfortable with this push toward digitalisation and have no qualms about sharing their data with lenders.
Thanks to their marketing strategies and customer acquisition tactics, Financial technology (Fintech) companies have successfully attracted new-to-credit (NTC) borrowers.
Additionally, since most traditional banks and lenders do not sanction loans below Rs 50,000, new-age Fintech players have capitalised on the opportunity amidst the increasing demand for small-ticket loans, particularly from first-time borrowers.
Wrapping It Up
The Indian digital lending landscape is evolving at a rapid pace, primarily influenced by government initiatives, changing consumer behaviour, and an increasing affinity toward digital platforms.
As things stand, it is a win-win situation for both the lenders and the borrowers. While lenders can access precious borrower data to offer tailored product recommendations and services, borrowers can enjoy the convenience and easy access to credit and other financial services.
India’s financial inclusion goals primarily hinge on its open digital infrastructure, the significant gap between credit demand and supply, particularly in the MSME sector and the underserved population, and its ambition to become a digital economy.
Finezza is on board with India’s push toward a digital financial ecosystem. As a result, we provide end-to-end solutions that aid growth-oriented lenders in conducting financial analysis and loan cycle management. Additionally, our cutting-edge account aggregator framework allows Financial Information Providers (FIP) and Financial Information Users (FIU) to share real-time financial data to facilitate organised lending, loan monitoring, and wealth management.
Get in touch with us to know more.
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