[Exclusive] Banks No Longer Relevant For Loans? Digital Lenders Are Disrupting Personal Loan Sector In India!

This is a Guest Post by Ms Sucheta Mahapatra, MD- India, Branch Personal Finance App

We are living in a time and age where we see a paradigm shift in the personal loan market. Cheaper, quicker, simpler, paper-less – no stones of comfort remain unturned. 

Inclusion of latest technology(machine learning and artificial intelligence), deeper penetration of the internet and increased adoption of smartphones are becoming the three main enablers for the adoption of Personal Loans. Last financial year India saw a 26% rise in overall personal loan volumes despite the grim outlook due to Covid. 

It is important to note that Covid marked a time in Indian lending where traditional institutions tightened the lending policies. This coupled with the decrease in mobility of users and surge in demand for capital catapulted the adoption of digital lenders. Acceptance of digital application in India Markets lies in its simple value proposition – faster and simpler flexible loan option. With the entire process from filing an application to verification to disbursement happening from the luxury of one’s home in the matter of hours, digital lenders took away the friction from the process. Furthermore, extended tenors and reliable ways to pay made the adoption easier.

The most remarkable part during this transformation is the acceptance rate itself. While only a handful of users get accepted by banks contingent on risk profiles, salary status, credit score etc, digital lenders embraced alternative data usage unlocking the access to underserved early 20s Indians especially from Tier 2 and 3 cities). Lending platforms for instance use data from the phone to create a cash flow statement and profile potential borrowers for risk elements. 

The offering and distribution of loans have significantly changed over the years. A decade back we were only provided with options of home/education/vehicle loan of certain minimum value. This was because it was financially non-viable to cater to lower size loans. It was operationally challenging and profits were lower. With digital lenders, the introduction of personal loans of all sizes from Rs.750 to a couple of crores, there is an offering. These loans are also available to unsecured, non-salaried employees who can prove their credit worthiness. Recent years have seen more unique models of Buy Now Pay Later, UPI linked lending and  credit line based lending. With the changing offering the distribution is no longer a simple retail distribution from a bank. It has evolved into Peer to peer, Business to Customer, and Business to Business to Customer models. This has helped in making sure excess capital in the market can be redirected to potential borrowers and grow the economy.     

As with all banking and lending institutions, trust is a critical part to growth. The government has played a significant role in increasing the visibility and veracity of personal lending. With stricter regulations, NBFCs and lenders have higher accountability which helps build trust among the end users. The government and RBI have also invested in financial literacy by directing Credit information companies to furnish Free Full Credit Reports which include credit scores to individual borrowers once in a  calendar year. 

Going forward, the Indian Market will become a hot cauldron of a financial evolution and a race toward unlocking financial access for the next half a billion users.