A strong growth has been witnessed in the consumer credit industry since the advent of the pandemic. With robust demand growth across the country and across income segments, we have seen demand increasing across geographies and demographics. While the Fintech ecosystem also had a meteoric rise in the recent past, the two enabled the rise of digital lending services, revolutionising the loan procurement and disbursal systems. Its increased popularity can also be attributed to inter alia increased smartphone penetration, flexibility on the credit range, and speedy online transaction.
According to a recent report by Research & Markets, digital lenders may capture nearly half of the total lending market and disburse loans worth $350 billion by 2023. This blitzkrieg could result in lending becoming the sector with the highest digital penetration in India. Thus making the digital lenders poised to take full advantage of the strong, positive global sentiment that investors and consumers have towards fintech.
Rise of digitisation in lending
The pandemic has accelerated the adoption of digital lending at least by a couple of years if not more. It has given lending the potential to change consumer perception by delivering convenient service and improving operational efficiency. Streamlined processes, paperless operations, workflow-based automated decision making, and credit scoring powered by deep analytics can all be used to deliver what customers want. Banks and financial institutions also need to be able to rapidly launch new products, across all the channels customers expect, at price points they are willing to pay and where the bank can earn the returns it needs.
Disruption and innovation in payments following commerce
Real-time payments, already commonplace in many geographies, are gaining ground in India. Point-of-sale credit options and buy-now-pay-later solutions are reimagining lending and improving the POS experience. Solutions such as Google Pay, and QR codes that provide tap or scan to pay options continue to grow. As e-commerce accounts for a greater share of spending—a long-standing trend of contactless payment has also been accelerated—cash being further displaced. Fintech innovations have brought BNPL to many businesses, which were far dependent on card and cash-based payments. This means they can improve cash flows, sales, and business growth. Hence, with demand for contactless payments growing, financing or credit at checkout has grown further in India.
Access to untapped audience segments
Today, digital lending provides complete financial inclusion by making finance accessible in all walks of life and geographies. It has given banks the potential to reach into the hinterlands of the country, thanks to internet penetration and smartphone adoption. Banks can rely on smart automated tools and analytical data to determine the creditworthiness of the individual lacking a credit score or payment history, etc. This has been one of the biggest boons of digitalization of financial services, providing accessibility to the underserved population.
Change in millennial behavior
2020 saw borrowing for health emergencies and credit refinancing as opposed to older behaviour of borrowing to purchase consumer durables. According to the Experian-Invest India Credit Ecosystem Review report, India’s domestic credit growth has averaged 15.1 percent from March 2000 to March 2021, primarily driven by retail loans and increasing penetration of credit cards. The study also finds that the consumer credit market continues to expand at a rate higher than most other major economies globally, with around 22 million Indians applying for new credits every month. This boom in India’s retail borrowing and its new group of borrowers presents a great opportunity for digital lending players. This was recognised by the banks and fintechs connecting with the consumer seamlessly (e.g. using vernacular) and using data to personalise offerings to each individual customer. On the other hand, millennials availed of digital loans in 2020 to meet their emergency fund requirements like medical expenses, and credit refinancing. It is a trend that was not seen in earlier years. There was also a surge in loan demand for home renovation post the lockdown, according to a report by CASHe, a digital lending platform.
Looking towards the future!
There is no doubt that COVID-19 has had an unprecedented impact on the retail lending industry – across geographies, sectors, customer segments, and product categories. While it is still early to assess the full-scale economic impact of the pandemic, the repercussions of the same are likely to be felt in the coming years. Both sourcing, as well as a collection of loans, has been drastically affected, with credit offtake at record lows and asset quality at highly degraded levels. Lenders are in a particularly challenging situation as they face multiple problems such as shrinking profit margins, bad debts and write-offs, and a liquidity crunch. After a major slump in the first two quarters of FY21, the later quarters are expected to bring in hope for lenders as the economy slowly witnesses signs of revival.
But how can the rapidly evolving digital adoption turn things around? Lenders such as banks, NBFCs, and other financial institutions should take this event as a turning point for retail lending in India. They must move fast to emerge as lenders of the future. As more and more customers are adopting digital banking and payments, these institutions must embrace digital to be relevant in the changing market. It is extremely important for financial institutions to get back to the drawing board and redefine their strategy, and rethink what their organization stands for. They must innovate across the board, including their service offerings, channels, operating model, and customer service. They must also optimize their expenditure and invest in projects that provide the most returns while propelling the organization towards its strategic goals. Lending organizations now have an opportunity to transform their operating models and emerge as modern, resilient, and lean organizations, ready to adapt and overcome the challenges of the future.
The author, Murali Nair, is President- Banking at Zeta. The views expressed are personal
(Edited by : Bivekananda Biswas)
First Published: IST