Authored by Ranvir Singh
Faced with a multitude of challenges today with the accelerating COVID-19 situation all around the globe, the Indian economy stands disrupted. Liquidity crunches remain one of the biggest challenges in the country, with a disconcerting pattern of loan defaults and NPAs shaking the confidence of the lending sector.
To combat this, banking institutions must look towards the ‘sunrise’ sector - that is the Tier-II, Tier III and rural population, who are fast emerging as drivers of the economy.
With the advent of smartphones and affordable internet connectivity, this segment is getting increased exposure to the wonders of online shopping, gadgets, fashion and entertainment. They are highly inspirational and willing to go the extra mile to fulfill their needs, matching the desires of their urban counterparts. The government’s vision for financial inclusion has ensured that over 80% of the population has Aadhaar-linked bank accounts.
Additionally, they are also quite tech-savvy - with Covid-19 boosting the impetus for contactless payments, a large portion has also adopted mobile payments.
The foundation for widespread consumption in rural regions has been set. What holds them back from matching the demand of the urban stratum is the lack of suitable financing options. Financial institutions have invested significantly in boosting the last-mile connectivity of their financial products.
However, one of the reasons for low adoption of instruments is commoditisation of products. Due to cost economics, products are typically offered in standard pre-defined slabs. And although financial institutions have tried to offer customised products through collaboration with innovative FinTechs, there is definitely ample scope to re-imagine products further.
In an evolving economy like India, FinTech lenders must navigate multi-faceted webs of compliances, regulations and the current domestic and global macroeconomic environment. Another crucial aspect is scrutinizing the psychology of a financial fragmented society that is India’s. Most of the communities in those areas have very little access to formal lending channels or have low or no credit history, making them unsuitable candidates for bank loans. This huge gulf can have an adverse impact of the dwindling aggregate demand in the country.
Tackling this would typically require the incorporation of some key attributes that are characteristic of the rural profile - they must be need-based, of short tenure, and have a small ticket-size. Such sachet financial services can succeed depending on their convenience, speed, easy availability, data security and customisation of offerings as per customer needs. In essence, lenders should change their approach from push-based products to pull-based ones providing need-based loans.
The case for small is big.
Adopting a sachet model can help combat the severe under-penetration of financial offerings that plagues the economy. Easy access to credit in small amounts, for immediate needs, and a for the short term.
Reduction in size of the packaging of the financial products and delivering it based on the Indian customers' unique requirements is the need of the hour. There is no point in offering a lakh rupee loan when the condition is only for Rs. 25,000 for a newly started working professional looking to buy a smartphone. These individuals' unique needs can be fulfilled when we understand their cash flow patterns that can serve better. This way, with the integration of smart technology, we can raise the country's credit-to-GDP ratio to bring it at par with those of developed nations.
Further, the recent contactless push has caused digital is witnessing sustained momentum. The trusted Kirana store, the backbone of rural communities, has gone online, leveraging the digital wave. It has created an increased awareness of the benefits of micro-credit options as well. They now realize that once the eKYC norms are fulfilled, digital loans can be disbursed almost instantly. The digital verification process is also inexpensive and time saver as compared with conventional mediums. The digitization of lending space has led to moving away from traditional credit sources that were expensing and burdening. The easy access to credit has made individuals meet emergency expenses like hospitalization, wedding, etc., in a much smoother manner.
Cutting-edge technologies like blockchain, analytics, machine learning, big data, etc., have enabled fintech companies to develop hyper-personalized financial products.
These technologies have played a vital role in reducing the risk of fraud or delinquencies by drawing insights from direct and alternate data sources. Thereby offering individuals with a secure platform to borrow from, rather than fall victim to unscrupulous moneylenders. In addition to it, digital loan providers are also deploying data-tracking tools that keep track of digital footprints and online profiles while even resorting to geo-tagging and mobile data scraping. Thus, the low costs and speed of disbursing small-ticket loans make these viable for both lenders and loan seekers.
Ranvir Singh is co-Founder and MD at Kissht. Views are personal
First Published: IST