Lending institutions need to go digital

Psst! Psst! Want to know a secret, lending institutions need digital lending platforms & they don’t know it yet.

There is a $730 billion opportunity in India alone & digital lending needs to digitise fast as its middle class is swelling and consumption is on the rise.

The world of core banking is already disrupted & banks are yet to fathom the impact fintechs have made. But, they are not yet worried with all the hullabaloo created by the press. Why? Lending institutions know that their core business of lending is not yet disrupted by startups. 

However disruptions happen at rapid scale, all it takes is a legislation from the government and a nod from the RBI to let fintechs into the lending play, then, the game is up for the age-old institution called lending bank, unless they accept digital transformation solutions to manage their lending business at scale.

The last eight years venture capital firms have funded fintechs which have disrupted customer preferences in banking. Payments, buying of insurance, investing & trading have all moved digital. 

Lending Institutions are happy to let these non-core businesses prosper. Most lending institutions partner with consumer apps to lend to customers. 

The old & the new

Lending institutions are yet to build technology that can evaluate and verify customers at scale, internally, in order to manage their assets. They are happy with the old core bank system. 

Herein lies the problem: the core banking solution allows for efficient handling of liabilities (deposits, borrowed funds from institutions) and are yet to power up their management of assets or the lending business. 

This is why lending institutions need fintechs which are building platforms that include loan origination and loan management systems along with AI based tracking algorithms to track defaulters in the retail, SMB and agriculture lending verticals.  

According to data available with Givfin there are close to 800k financial institutions in India and less than 5 percent have been digitised. The journey to digitisation is not hard because the RBI mandates that digitisation is important. However, it has not yet made it compulsory because of political compulsions and regional challenges.

RBI believes that ease of accessing digital financial services, technological innovations and cost-efficient business models will eventually lead to meteoric rise in the share of digital lending in the overall credit.

Why does the RBI want digitisation?

The larger issue, the RBI cites, is protecting the customers from widespread unethical practices and ensuring orderly growth. 

RBI sees the benefits and also cautions itself to the problems, created by technology, at hand. During the pandemic there was a massive upsurge of digital lending and this unbridled extension of financial services to retail individuals is susceptible to a host of conduct and governance issues. 

The RBI observes that in the view of the ease of scalability, anonymity and velocity provided by technology, it has become imperative to address the existing and potential risks in the digital lending ecosystem without stifling innovation.

However, the RBI also realises that for India to become a $5-10 trillion economy banks and other lending institutions have to go digital for their credit verification and evaluation. Consumption is on the rise and so are Indian businesses. 

RBI cleverly cites that algorithms need to be auditable. 

• Compliance with the prescribed baseline technology standards should be a pre-condition to offer digital lending by the regulated entities (REs) and by lending service providers providing support to REs.

• Each Digital Lending Apps should have publicly available policies regarding data storage, its usage and privacy.

• Data should be stored in servers located in India.

• REs should document the rationale for the algorithmic features aiding lending decisions that should ensure necessary transparency.

• Data should be collected from the borrower/ prospective borrower with prior information on the purpose, usage and implication of such data and with explicit consent of the borrower in an auditable way.

All in all an adaptive comprehensive regulatory framework for FinTechs is already in place. 

The future 

If a banker is reading this then you know digital lending is the future and evaluating and verifying them at scale requires the core banking to be powered by algorithms.  

The writing is on the wall because lending institutions want to become fintechs themselves in order to capture the ever demanding customer whose lifestyle and consumer habits are changing. The secret is out, let givfin hold your hand and usher you into the era of fintech. 

Go digital. Psst! Psst! visit our website to know about digital transformation of lending institutions.