The proverbial story of the chicken and egg is the ideal when it comes to depicting the reality of the Indian lending landscape. Borrowers require a lending score to borrow money but do not have anything as such since they have never applied for a loan before. Traditionally, borrowers also had to comply with the lending institution’s stringent demands, wait patiently for loan approvals, and submit various documents, extending the lending life cycle.
In this scenario, financial technology (Fintech) companies and non-banking financial companies (NBFCs) have emerged as the unsung heroes. Driven by government initiatives and high internet penetration, digital financing has gained significant momentum in recent years, and for good reasons. As evidence of this,
Fintech companies disbursed loans worth 92, 267 crore rupees in FY 22-23, against 76,396 crore rupees in FY 21-22.
The evolving consumer behaviour and growing demand for branchless financing are redefining the Indian lending ecosystem. The change is further fueled by the integration of cutting-edge technologies, including artificial intelligence (AI) and data analytics.
This article helps our readers understand how the arrival of Fintech is gradually transforming the lending life cycle in India.
What Do We Mean by Fintech Lending?
Fintech lending primarily refers to the use of cutting-edge technology such as AI, machine learning, and data analytics to identify, evaluate, and disburse loans. These technologies empower lenders to make informed decisions and trim the lending life cycle, resulting in a faster and data-driven lending process.
Fintech financing has made capital more accessible for underserved groups such as small businesses and peer-to-peer borrowers, creating a competitive lending market.
How Fintechs Drive Transformation in the Lending Life Cycle?
Now, let’s explore how Fintechs are improving the traditional lending life cycle.
1. Introduction of Alternative Lending Models
Fintech companies have swiftly made inroads into the lending ecosystem by catering to the needs of the large, untapped population seeking accessible and convenient financial solutions.
Alternative lending models introduced by Fintech companies are poised to replace incumbent and inflexible traditional lending models as the latter have been unable to narrow the gap between credit demand and supply.
And what do we mean by alternative lending?
Alternative lending primarily refers to loans disbursed via non-traditional channels such as digital platforms instead of traditional lending institutions such as banks. For example, peer-to-peer lending is one of the best examples of an alternative lending model where individuals can provide loans to businesses and individuals through tech-driven digital platforms.
2. Fintech Companies are Transforming Data Utilisation
Traditional lenders haven’t been able to look beyond some of the most basic data points, including demographics, credit bureau data, and credit scores, to assess the creditworthiness of their borrowers. It is safe to say that determining the creditworthiness of underbanked individuals and businesses was a lengthy process, extending the lending life cycle, and resulting in dissatisfied customers. This is one of the major reasons why credit access was often time-consuming and inconvenient for underbanked borrowers.
Unlike traditional lenders, new-age Fintech companies evaluate a borrower’s conventional and non-conventional data points to create accurate and robust borrower personas. Today, Fintech companies also assess social media behaviour, financial transactions behaviour, payment behaviour, and app-based data to make a holistic assessment of a borrower’s creditworthiness.
3. Building an Instant Loan Culture
It is worth noting that around 67% of Indians rely on personal loans to meet their fund requirements.
Fintech companies are the pioneers of instant loans, setting them apart from banks that take weeks and even months to approve loans. How are Fintech companies managing to reduce the traditional lending life cycle? Their success on this front can be attributed to a range of factors, including minimum eligibility requirements and digital document and identity verification.
As a result, borrowers from the remotest parts of the country have access to instant credit thanks to the streamlined and data-driven approach adopted by Fintech companies.
4. Machine Learning to Create Borrower Groups
While Fintech companies are leaving no stone unturned to provide seamless customer service, they are leveraging ML algorithms to improve the accuracy of credit assessment. They primarily lean on reinforcement models to learn from past mistakes and segregate bad borrowers from good ones based on their behavioural patterns.
Fintech companies are also extensively using ML to differentiate their product offerings from their competitors, resulting in better, flexible, and consumer-centric product offerings.
Additionally, their optimized products and services play a significant role in streamlining the lending life cycle, resulting in higher customer satisfaction.
There is no doubt that modern and sophisticated Fintechs have emerged as promising alternatives to traditional lending institutions. That said, Fintechs are the new entrants in the ecosystem and will take some more time to expand their market share.
Fintechs should prioritise innovation and fill the gap between credit demand and supply. Additionally, they need to stay on their toes and study borrower behaviour, leverage cutting-edge technologies including AI and machine learning, and harness the power of data analytics to overcome the challenges of the traditional lending life cycle.
As a lending life cycle management tool, Finezza offers a wide range of innovative solutions to improve and organise your lending cycle management and credit evaluation services. Our web-based platform is designed to aid lenders in making informed decisions and facilitate seamless credit assessment.
Contact Us today to know more.