Digital Lending & the future of platforms

The market for digital lending platforms is going to explode, but the world still wants to hang on to the tedious old ways 

To understand the impact of platforms on digital lending one must look back to the past. History is important because lending institutions are still hanging on to the older ways of doing business. 

Just thirty years ago, the positive affects of the internet were just being discovered on the world of consumers and business. Fifteen years ago the fall of storage and compute costs, thanks to the emergence of cloud technology, sped up the era of rapid innovation and information exchange. 

Come to think of it, banking began to adapt to the era of information by quickly deploying core banking solutions. 

What happened over three decades is that while they managed their liabilities extremely efficiently, they did not manage to stay in pace with innovation happening in the startup world & the era of rapid crunching of data to manage assets, which continued to be painstakingly stalked by a paper documentation regime. 

The consumer behaviour changes that have happened in the industry, thanks to technology, are making boardrooms think strategically and have now merged their IT and business teams together. 

Here is why going digital is important for lending institutions.

According to Markets and Markets, here are the drivers of digitisation. 

• There is high penetration of smartphones and growth in digitisation across all businesses. 
• Lending institutions realise they need to improve customer experience. 
• Regulations are pushing lending institutions to go digital. 
• Borrowers and lenders can all be on one platform.
• The pandemic has hastened the process of digitisation. 

However, a majority of lending institutions in India and across the world are still dependent on traditional lending models. Why? They have a set customer base and old ways of customer underwriting (paper based decision making), gut feeling and using only a credit score as a matter of making decisions. Secondly most lending institutions are confined by their sponsors or the State. The bank may support only a particular community of businesses or vocation & it may even want to play to the dictates of the State. 

Although the USA & Europe are quite ahead in digital transformation. Africa, LatAm & Asia are yet to go completely digital. 

In India alone more than 500k lending institutions need to be digitized. 

Some of the drivers that will push digital adoption is the new economy of businesses. SMEs will work with lending institutions that can reach out to them faster. Bankers who realize that managing assets is core to their business will ensure that digital adoption is imminent, yet many of them will have to wait for board room transformations before real digital adoption kicks off. 

Yes, artificial intelligence and machine learning are buzzwords and startups are making an impact, but only a State that mandates digital adoption will ensure that its economy truly goes digital. 

At least the opportunity exists in SME and agriculture and here is why. 

In a recent Hindu BusinessLine report:

Of the agriculture loans of about ₹11.60 lakh crore in India, Kisan Credit Card loans make up about ₹7 lakh crore or nearly 65 percent. In numbers, agri loans are more than 50 percent of the total loans of large banks like SBI, Bank of Baroda and Punjab National Bank. That is, if the total number of borrowers for a big bank is say, 3 crore, farmer loanees would be 1.5 crore with the rest distributed among home, vehicle/personal loans, MSME and corporate borrowers. The last category would be the least in number at a mere 25,000 or so.

The “newspaper” drives home a key message:

This makes it operationally daunting to cater manually to the agri portfolio leading to delays at the last-mile level despite the efforts of the frontline credit officers. Digitising the loan journey is the only solution to ease the process hence. (Source: Hindu Businessline, August 26th, 2020). 

We at givfin have seen lending institutions embark on this journey. Those who have moved fast have created new journeys for their customers. 

Now why is this important, farmers and SMEs will be free from loan sharks. Lending institutions can increase their loan book with new methods of underwriting and also manage these assets thereby enabling customers to repay diligently. 

Remember platforms powered by automated algorithms are customisable and far more accountable when applied in a larger context of managing a lending business at scale. 

Platforms are here to stay, it’s time for you to embrace them.