Understanding How Digital Lending is Working in India

In India, digital lending has progressed far beyond account aggregation and B2B loans. For many of India’s lending tech entrepreneurs, the Indian customer is quickly becoming the low-hanging fruit. Due to low income growth over the previous year, India’s digital lending boom is being fuelled by tremendous consumer demand. The fact that 5.6 million credit cards are issued annually on average exemplifies credit’s expanding importance.

The addressable market for consumer credit is set to grow in Indian cities as urbanisation and formal employment rise; however, this does not mean that the sector is without its own set of issues. However, official employment, as measured by the number of EPFO accounts, has increased fourfold from 44 million in FY 15 to 161 million in FY21. With specialist products like sachet loans, advance salaries, and BNPL (Buy Now Pay Later) offerings, lending software businesses are capitalising on this potential.

Between 2014 and Q3 2020, about $2.4 billion was invested by venture capitals in Indian lending tech businesses, indicating that investors are optimistic about the sector. And the recent Inc42 Plus research, Lending Tech In India: The Rise Of Consumer Lending, Report 2020, echoes this sentiment.

Different Business Models in the Lending Landscape

Image Source: Enterslice

To suit client demands and legal restrictions, a variety of business models have been established. As a result, the issues provided by geography, higher transaction costs, and transparency have been addressed.

The following are the several types of digital lending business models:

P2P Lending

In this process group of people come together and lend money to each other. Peer to peer lending has been there for many years. Many small and ethnic business groups having similar faith or interest generally support each other in their start up endeavours.

POS Financing

It’s a service that allows any merchant to collaborate with financial institutions to provide solutions to their clients at the point of sale. It not only expands merchant capabilities, but it also allows customers to extend their payment margin by using credit facilities provided by financial institutions.

Buy Now Pay Later

Pay Later loans are a new type of finance that is becoming popular among e-commerce companies. They are small-ticket immediate loans that let customers buy something now and pay for it later on a set schedule. These payments are sometimes interest-free.

Loan Marketplaces

This platform allows customers to compare loans from various banks and non-banking institutions. To match borrowers and lenders, certain algorithms are used. Bank Bazaar, Paisa Bazaar, and other loan market areas are examples.

Digital Lending Platforms

End-to-end digital lending products are provided in this situation via mobile or web-based platforms. From customer acquisition to loan delivery, the entire lending process is computerised. It aids in the reduction of traditional onboarding timeframes and the increase of onboarding efficiency.

Supply Chain Financing

Supply chain financing is another way that financial institutions are lending short-term working cash to MSME enterprises. In essence, businesses with strong credit scores can work with a variety of vendors (that lack access to organised credit). MSMEs can then collect payments from FIs directly using the pending payment invoices.

Line Of Credit

A line of credit is a revolving account that allows borrowers to borrow and repay money from a pool of funds. MoneyTap is an example. Interest is levied at a rate of 15 to 17 percent on average. A line of credit has a minimum term of two months and a maximum term of 36 months.

SME Lending

Small- and medium-sized business loans are loans for small firms. It is beneficial in meeting the needs of small enterprises in the course of their operations. These requirements include launching a new product, relocating, recruiting new staff, marketing, and so on. Farmart, Flexiloans, and others are instances of this type of digital lending business model.

Invoice Financing

It is a lender-provided short-term working capital arrangement for Micro, Small, and Medium Enterprises based on overdue customer bills. It is utilised to address Micro, Small, and Medium Enterprises’ short-term financial needs, allowing them to expedite their accounts receivables.

Alternate Credit Scoring

It is a broad credit scoring technique that employs technology to examine a variety of criteria such as a borrower’s payment history, spending habits, and so on.

Why is Digital Lending Gaining More Traction?

Image Source: Enterslice

The Indian market has seen an exponential increase in demand for short-term loans for purchases and spending in recent years. This can be determined by the fact that 5.6 million credit cards are issued in India each year on average. As credit based purchases become more widespread even in semi-urban areas, the number of credit cards in India is increasing at a compound annual growth rate of 24%(2013 to 2019).

Image Source: Inc42

Along with regular credit cards, other credit products like “Buy Now Pay Later(BNPL)” and “Advance Salary” or “Payday Loans” are becoming more popular. The rise in popularity of such new-age digital lending solutions can be attributed to more Indians entering the workforce and their rising preference for credit-based purchases.

There are around 1,263 digital lending firms in India, with over 147 (12 percent) of those receiving venture capital funding. B2B lending firms continue to be the most popular sub-segment within the lending tech market, with venture capital inflow expanding at a 72 percent CAGR(2015-2019).

Between 2014 and Q3 2020, B2B lending dominated VC funding with a 54 percent share, whereas funding for B2C lending businesses fell between 2019 and 2020. Consumer lending startups, on the other hand, received 16 percent of the capital, or $393 million, out of a total of $2.4 billion during this time period.

Image Source: Inc42Plus

When looking at funding by startup stage, the growth stage is the most chosen sector for venture capital investment in lending tech businesses. Growth-stage businesses, which are rapidly expanding their market share and experimenting with new approaches to attract customers, have dominated in terms of funding amount and transaction count, accounting for 60% and 40% of all funding rounds, respectively.

The Bottom-line

By 2023, the digital lending sector might account for up to 48% of all lending transactions. It has the highest digital channel penetration of any segment in India. Experts believe the industry has a bright future because of the following factors:

    • A fintech ecosystem in its early stages of development
    • Non-traditional players are becoming more involved.
    • A regulatory environment that is both strict and nurturing.
    • Institutional collaborations that are evolving

Finally, the digital lending sector can increase customer acquisitions by being more customer-centric. Digitalizing loan processes will also be a significant step toward financial inclusion for India’s remaining 90%.

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