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Why Digital Lending is the new normal

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By Ankit Satsangi, Chief Risk Officer, Capital Float

The Fintech sector in India is an ever evolving landscape intertwining continuous innovation with financial accessibility to the masses. Being a relatively new entrant to the digital field, India, has already emerged as the fastest-growing e-commerce market across the globe, driven primarily by a digital-first approach met with a low data cost regime. Favourable market conditions and significant enhancement of the sector has left the space ripe for disruption.

In India, where multiple issues in accessing financial services are prevalent – the need for formal (digital) financing options particularly for the underserved population has risen drastically in the last couple of years, given the proliferation of the cell phone, internet and other adjacent services. The lack of interest of traditional financial institutions to serve risky, low-income but credit-devoid consumers and geographies has enabled new-age digital lenders, leveraging cutting-edge technology and alternative credit assessment models, to quickly bridge the gap and reach a wide customer base. Digital lending fintechs are thus able to reach geographical extremities and induct India’s previously unbanked, missing-middle, into the formal banking system.

The Covid-19 pandemic has affected all sectors and industries, including the fintech space, both positively and negatively. While physical retail took a major hit and suffered huge declines in sales, the e-commerce sector flourished due to the shift in consumer spending and priorities (health and hygiene), which in turn greatly accelerated the adoption of digitization across the nation and propelled fintechs in the consumer lending and P2P payments space.

Prior to the Covid-19 pandemic, other challenges have been prevalent in the industry for some time. Easy assimilation and acceptance of digital finance among age groups (50 and above) has proven relatively hard in contrast to the Millennial (and later) generation’s openness with and utilisation of digital finance. Time consuming documentation processes, complex repayment terms and high interest rates associated with traditional borrowing have persuaded young consumers to make the shift to digital finance. Digital lenders, now more than ever, need to adapt to customer focused models and offer credit products centered on the needs of the borrowers. Utilization of cutting edge technology such as artificial intelligence (AI) and machine learning (ML) have restructured various processes, effectively providing a more inclusive underwriting process and reducing costs.

Fintech companies are currently playing a pivotal role in financially including the marginalized and underserved section of the population while aiding the country’s recovery from the pandemic. The paradigm shift from large term loans to high frequency micro-loans, seems to be the future of lending. Successful digital lending models will need to achieve a balance between digital data based lending and local collections. As the country opens up, the forward outlook of the digital lending sector looks very positive with consumers accepting the new normal and incorporating “digital” into their daily life.


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