Is digital lending a boon or a curse to customers?
Digital lending apps are known for providing easy and quick loans without much hassle, but they have been in the news lately for all the wrong reasons like excessive service charges, high interest, defamation of defaulters, etc.
However, not all of these digital platforms are user-friendly and offer borrowers the option of improving their credit rating by making timely repayments or worsening the rating by casually taking small loans and ignoring the repayment schedule. .
“As far back as anyone can remember, loans have always been negotiated in person, with lenders providing money to borrowers in exchange for interest. Over the years, lenders have been overtaken by banks and financial institutions and now banks are overshadowed by NBFCs and FinTechs. As digitalization gains in scope and intent, it also advances in the lending landscape. Given the accelerated adoption of the FinTech revolution during the pandemic, digital lending has become the today and the future of lending,” said Ajay Chaurasia – Vice President: Marketing, Products and Business, RupeeRedee.
“The pandemic has necessitated financial emergencies and limited access to banks and financial institutions, shifting Indian customers to digital lenders when needed. According to the Fintech Association for Consumer Empowerment (FACE), fintech lending companies have doubled digital lending in FY 2021-22, disbursing a total of 2.66 crore in loans worth Rs 18,000 crore. . Meanwhile, RBI has identified over 600 illegal loan applications in 2021, more than half of the total loan applications in India. This clearly indicates that a host of factors are driving FinTech growth,” he added.
Chaurasia lists the advantages of fintech and the challenges it faces:
Instant loan disbursement
Digitizing the entire loan disbursement process, from loan application to credit assessment, has helped digital lenders reduce turnaround times. Additionally, collaboration within the financial ecosystem to benefit from real-time KYC has significantly reduced the time wasted in customer authentication. Digital lenders assess creditworthiness using technologies such as artificial intelligence (AI), data analytics, etc., which helps them offer accurate loan amounts instantly. As a result, customers in dire need of financing can turn to digital lenders for their quick turnaround, 100% digital process, and loans by the bag.
More accessibility and inclusion
Clients are often excluded from the formal financial services framework due to lack of collateral, a decent credit rating, or being new to credit. As a result, MSMEs, rural population and low income groups fall prey to informal lenders and loan sharks. New era fintech companies are bridging this credit gap for underserved and unbankable populations by creating a robust digital lending ecosystem. Digital lenders calculate creditworthiness by assessing customers’ digital footprint, current financial status, historical behavior, etc., not just credit score. Additionally, the use of automation and AI for document review, creditworthiness, etc. removes bias from the application process.
Seamless customer experience
Digital lending apps are designed to simplify the time-consuming and inaccessible lending process as it once was. Under the conventional loan process, loan applicants would visit the bank multiple times and wait months to hear the bank’s credit decision. With online lending platforms, the path to getting loans has been shortened, made much more comfortable and less stressful. Now customers can get loans straight to their bank accounts from the comfort of their own home within hours of applying. As a result, lending has become fluid, accessible and inclusive.
Main challenges affecting accessibility
While the speed and ease of access to digital lending is a boon to customers, it can also spur consumers into financially harmful behavior. While loans become accessible with just a few clicks, digital loans trigger reckless activities such as impulsive borrowing and spending. Easy access to credit can encourage customers to waste money or deplete the loan irresponsibly. Moreover, digital access to credit also increases borrowing cases among consumers. The use of personal devices, a sense of anonymity and privacy reinforces secretive behaviors that can prove financially and emotionally damaging in the long run.
Apart from this, over the years, the exponential growth of digital lenders has led to an increase in incidents of illegal entities cheating innocent customers in need of small loans. These entities charge exorbitant interest rates, harass customers for late or non-payment of loans, and misuse customer data. These illegal entities are not registered as bank or non-bank financial companies and are far from being regulated. Heavy job losses and financial emergencies during the pandemic have driven several customers to illegal digital lenders, causing irrevocable damage to credit scores and lives.
Key points to remember
It is undeniable that the advantages of digital lending far outweigh the disadvantages. In the future, digital lending may become the new standard for extending credit to underserved sections of society, provided they are tightly regulated and consumers exercise caution. Backed by the government, regulated by the RBI and embraced by customers, digital lending can pave the way for financial inclusion, even at the bottom of the pyramid.