Opinion | The future of digital lending

In India, in the last seven years, there has been a paradigm shift in customer behaviour from offline to online financial transactions along with the rise of fintech companies which have enabled this change. Broadly speaking, lending can be broken up into five parts - customer onboarding, underwriting, disbursement, repayment and collection. The digitisation of the process has had mixed results globally, and what we have seen evolve today is a hybrid model, where a combination of technology and feet-on-street offers the most viable and scalable proposition.

Customer Onboarding:

Digitisation of customer onboarding has been varied depending on whether it’s a personal or an SME loan. The prioritisation of CX (customer experience) and UX (user experience) have made the process of applying for a personal loan seamless. SMEs on the other hand have had a mixed experience, with a majority continuing to rely on DSAs. However, SMEs looking for smaller ticket loans have been able to benefit from the change in the personal loan application flow.

Underwriting:

With additional data points available from various platforms (e.g. marketplace purchase pattern, return patterns etc.), lenders can now underwrite consumers with alternative data as well. Introduction of GST has allowed lenders to underwrite SME loans better using a wide range of models.

However, every model relies on the stability of underlying data to predict a customer's default probability. The covid-19 crisis has, however, rocked the system due to several aberrations - delay in GST data, non-availability of moratorium information with the bureau, among others. As underwriting becomes challenging in the short-to0medium term, we will move into a world where additional checks will be needed and supplementary information sought from borrowers to address risk concerns. Most lenders, it is believed, will use a hybrid human and machine underwriting model until they are confident that the macro has improved.

Introduction of OCEN along with leveraging the AA infrastructure are continued efforts to streamline, automate underwriting and reduce TAT for borrowers. There’s a long way to go to see how this plays out but it’s a step in the right direction.

Disbursements, repayments & collections:

Disbursements and repayments are two aspects of lending where technology has played a crucial role in ensuring instantaneous credits and debits. Borrowers are able to access funds in a matter of seconds. Lenders know, on the due date itself, how many borrowers have paid up and how many have defaulted and therefore set up quick collection response strategies.

Collection of dues from defaulting customers will continue to be a hybrid model. Lenders will need models to predict & identify high risk customers but will also need FoS (Feet on Street) to visit customers and understand the on ground issues. The key to building a strong digital lending process is to find the right balance between technology and FoS. This has me convinced that the future should hold more collaboration between banks and fintechs-NBFCs.

Banks & Fintech-NBFCs' Collaboration:

The collaboration between banks and fintechs-NBFCs is here to stay. I'm fairly certain this collaboration has not realized even a tenth of its potential in India. As fintechs continue to build technology that will allow SMEs and individuals to operate effectively through SaaS and PFM platforms, banks will have access to alternative data and monitoring that only new-age fintechs can offer. The key to success of this collaboration is the ability of fintechs to underwrite effectively and collect efficiently. Indian fintechs have had to deal with challenging macro events since inception: demonetization, GST, the IL&FS crisis, and now the pandemic. The learnings from each of these will only make processes and procedures stronger and should therefore give banks greater confidence to collaborate with fintechs. Borrowers will benefit from this through access to a wider pool of capital and a better CX.

Digital, Financial Literacy:

With technology playing an increasingly important role in lending, the onus on lending entities will shift from digital literacy to financial literacy of customers. I also see a rising importance of transparency from lenders. The onus to educate the borrower on where the loan is originating from, the outstanding amount and the repayment date will always lie with the lenders. RBI's recent regulation on non-lending fintech platforms is a right step in this direction.

Digital lending is here to stay, but to ensure its success what is needed are stronger guard rails from both a legal and compliance perspective. Will CKYC grow to offer scale or can two regulated entities share vKYC to ensure smoother customer onboarding? Will a digital loan agreement for a 50 lakh loan stand scrutiny in a court of law or will the legal establishment demand wet signatures and a physical loan agreement? While the infrastructure to answer these questions is present today, the key as always is change in policy and mindset that can fasten this transformation.

Akshay Sarma is Head - Capital Markets, Capital Float.