The past decade has witnessed unprecedented advancements in technology, transforming the way we live, work, and interact with each other.
The financial services sector, in particular, has been at the forefront of this technological revolution. One area that has seen significant innovation is digital lending, which has evolved into Digital Lending 2.0.
As per recent reports, digital lending in the financial year 2023-24 has witnessed a 49% surge in disbursements at INR 1.46 trillion.
Digital Lending 2.0 is built on the principles of customer-centricity, innovation, and risk management. This new era of digital lending has been made possible by advancements in technologies such as Artificial Intelligence Intelligence (AI), Machine Learning (ML), and data analytics. In fact, AI adoption within the banking sector is forecasted to reach a significant $64.03 billion by the year 2030, highlighting the industry’s strong dedication to incorporating AI.
Digital Lending 2.0: Core features
One thing is certain—the measure of success for financial services companies now revolves around their ability to employ technology effectively and harness the full potential of their data to craft innovative and bespoke products and services.
1. Improved customer experiences: Digital Lending 2.0 provides a seamless, omnichannel borrowing experience. Customers can conveniently apply for loans, monitor application statuses, and manage their loan accounts via an intuitive online platform or mobile application.
2. Better risk assessment: Employing technologies such as machine learning, artificial intelligence, and data analytics, Digital Lending 2.0 enhances risk assessment capabilities. This enables lenders to more accurately evaluate the creditworthiness of prospective borrowers, thereby mitigating the risks of default and fraud.
AI-driven innovations are shaking up the traditional practices of lending, ushering in a new era of risk assessment and decision-making.
3. Customised offerings: Digital Lending 2.0 delivers loan offerings, interest rates, and repayment options tailored to individual customer profiles. This customisation enhances customer satisfaction and loyalty.
4. Real-time processing: The system allows for the real-time processing of loan applications, significantly reducing the time and effort associated with loan disbursement.
The current state of affairs
Digital lending has continued revolutionising the ecosystem of lending for businesses such as B2B and working capital lending. According to the form of digital lending, organisations are made to fulfil their working capital needs at the point of cash flow or scaling their operations. With quicker application processes, digital lending provides access to formal credit channels for small enterprises to avail of short-term working capital loans and effectively scale their operations in MSME financing. It offers mechanisms for credit extension to suppliers within a supply chain, thus improving cash flows and reducing default risk.
Furthermore, digital lending has transformed B2B lending and working capital lending, providing businesses with access to credit on-demand and enabling them to manage their cash flows more effectively. FinTechs like CredAble are enabling multi-faceted digital underwriting modules empowering lenders to assess creditworthiness more accurately and in turn, reducing the risk of defaults and frauds. Overall, digital lending has democratised access to credit, promoting financial inclusion and driving economic growth.
To regulate digital lending, RBI released a few guidelines on Digital Lending in September 2022.
The Guidelines apply to digital lending services extended by banks and non-banking financial companies (including housing finance companies, “Regulated Entities” or “REs”). It is clarified that the scope of digital lending would extend to lending activities that involve some physical interface with the borrowers, such as customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service.
However, digital lending also involves certain risks and challenges that lenders and regulators need to address.
Challenges faced by the lenders
Let’s now run by the key challenges faced by lenders in this space:
• Data security: The rise of digital lending has increased the risk of cyber fraud and data breaches.
• Regulatory compliance: Banks must navigate complex regulatory landscapes and as a result lending platforms must comply with all regulations.
• Credit risk: Lending platforms must assess the creditworthiness of borrowers and manage the risk of defaults.
• Scalability: Lending platforms must be able to scale quickly to meet growing demand.
Final thoughts
Digital Lending 2.0 has revolutionised the entire lending ecosystem by giving smooth, omnichannel borrowing, high-quality risk assessment, proper customisation, and real-time processing.
The impact of this revolution extends to all sectors including MSME finance, supply chain finance, and B2B lending.
While there are several benefits from digital lending, it also poses challenges in data security, regulatory compliance, credit risk, and scalability. Going forward, lenders and regulators need to address the challenges to ensure sustainable growth and innovation. By adhering to the guidelines released by RBI, lenders can contribute to a more transparent and accountable digital lending ecosystem.
