Digital lending although existent in India for close to a decade now consists of money lending through online platforms or digital lending platform apps. Digital lending platforms rely exclusively on technology to perform credit evaluation and authentication. Digital lending provides a superb opportunity for under-served credit starved salaried professionals. Even in today’s times, we resort to informal credit sources such as borrowing from a friend or family, moneylenders, asking for their company for extra cash etc. These borrowings are provided at inflated interest rates basically because of being a flexible, quick and convenient option. We also see borrowing funds as a taboo. We feel that no one should know about our debts. But slowly, this is changing with the progress in digital lending.
Although traditional lending solutions like banks are urging the general public to apply for personal loans, they do so by charging higher interest rates due to the absence of collateral. This coupled with a slow and document heavy application process in banks lead to frustration and disappointment.
India with its close to a billion unique digital IDs and more than 650 million mobile phone users offer digital lending the perfect breeding ground to access credit via tons of digital activity such as social media presence, online transactions, spending patterns etc. These activities can be tracked and serve as fodder for credit bureau report generation which in turn allow digital lending platforms to analyze risks.
You might worry as to how reliable is a web platform for me to share my personal and my banking information? Digital Lending has precaution towards data security by adding a secure socket layer (SSL) which establishes an encrypted link between the platform and your browser ensuring the data that passes between them remains private.
What is Digital lending?
Digital lending offers a platform where individuals can lend their money to borrowers who are looking for a loan. The borrowers get the funds they need and lenders earn returns on the money they lend. Digital lending platforms in India enable borrowers and lenders from across India to connect with each other. The returns are attractive for lenders to invest small amounts of money to different borrowers.
Borrower profiles are evaluated by the digital lending platform to assess his/her credit worthiness based on their current financials. This borrower analysis is then sent to a pool of lenders who then provide the loan in the form of money directly to the borrower’s account. The borrower then pays the monthly EMIs to the lender directly. The digital lending platform keeps track of the borrower’s repayment history and pending future payments.
Borrowers in need of emergency funds for health, travel, wedding, home improvement etc. can get the loan with less time being wasted. Personal loans with no collateral are perfect for lenders and borrowers. It is always advisable to approach a digital lending platform that follow RBI rules for fund transfer. People have thus lent money to those who require it by charging a rate of interest on the principal. Just like you lend money to a friend or relative in need with or without charging an interest rate.
It was inevitable! With years of pain points not addressed, lengthy paperwork not shortened and weeks of uncertainty to learn of your loan status, banks are no longer the single largest lending monopoly.
Digital lending platforms have taken the lead in terms of quick service, digital process, disbursement within few hours etc.
Let us look at 3 ways through which Digital lending is strengthening financial services around the globe.
- Automated underwriting using data modelling.
- The time delay with banks has evaporated (Apps, internet and more…)
- Quicker disbursement due to automated assessment and lending processes
- Innovation has ensured better quality of customer service with chat bots, online chats etc.
- The risks taken by Digital lending platforms are tremendous compared to banks. Via Digital lending borrowers don’t have to physically apply for the loan. Based only on documents.
- Credit Risk (unsure of repayment), Market risk (unpredictability) and Operational risk (cyber-attack, technology outlay etc.) are 3 risks that digital lending platforms face head on while trying to serve the under-served.
- The traditional finance sector has always been a slow moving one. Digital lending uses “Speed” as a by word for all its operations.
- Digital lending is simply based on technology, that means the processes are automated and hence traditional lending solutions such as banks will need to take more time to shift from years of standard tedious practices like lengthy paperwork, long list of documents etc.
Now that we know what Digital lending is and does, let us look at 4 advantages it offers compared to a traditional lending solution like banks.
The documentation required by digital lending platforms is less. Your efforts with endless paperwork involving dossiers of application forms, attested documents, reference checks, photocopies etc. are saved thanks to a digital process. All you need is your computer or smartphone and internet access.
Credit history supplemented by social authorization
This is only applicable for first time borrowers. When you go to a bank and say you need a loan, you will be scoffed at. This is because the bank does not know anything about you. Your credit history (maintained by credit bureaus) shows the bank your loan repayment behavior. With no loans taken prior, the absence of credit history makes banks skeptical about providing you a loan. Digital lending platforms allow you to connect your social media profiles for Facebook, LinkedIN and Google+. Doing this not only acts like an identifier for the borrower but also aids in improving your chances to get the loan approved.
No Prepayment penalty
Banks charge a prepayment penalty for clearing a loan ahead of the completion of tenure. This is quite unfair considering you have just received a bonus and want to clear off the loan. Few digital lending platforms allow you to clear your loan before the completion of loan tenure. Doing so not only relieves you of your debt but also helps build a positive credit history with the platform for future loans.
Easy and quick process
The personal loan application process through a digital lending platform can be completed within minutes. It’s a good idea to read the FAQ page of the platform first and then keep all the required information at hand. Use Netbanking to provide banks details as it’s the quickest and most secure way of sharing financial information. Post disbursement process of EMI payment and tracking is done digitally.
Digital lending is certainly here to stay. It is only a matter of time for millennials to use digital lending as their preferred solution for funding woes.