The world of finance is undergoing a remarkable transformation, and at the forefront of this is the fintech lending industry. What has been the trajectory of the sector and how has it transformed the lending space?
One of the most compelling indicators of the fintech lending industry’s progress is the ever-increasing disbursement figures. A recent report by TransUnion CIBIL shows that fintech lenders have taken centre stage as the primary drivers of volume in the broader consumer lending market.
Rising disbursements: Numbers don’t lie
If we look at loan origination in the case of consumption loans (loans which help people purchase belongings like cars, motorbikes, televisions, refrigerators, etc), we see that while such loans from all lenders have gone up by 2.9 times in 2022-23 as compared to 2018-19, the rise in loan origination of consumer loans on fintech platforms have gone up by a whopping 15X from Rs 0.07 lakh crore to Rs 0.84 lakh crore from 2018-19 to 2022-23.
Another prominent trend is the rise in fintech lending which has fuelled consumption through personal and consumer loans. As of March 2023, personal loans (54.2 per cent), business loans (24.3 per cent), consumer loans (6.5 per cent) and other loans (15.8 per cent) constituted the fintech lending portfolio.
The data also reveals that in FY2022-23, fintechs disbursed a staggering 10-fold increase in consumption loans compared with FY2018-19.
Digital Loans: The Engine of Financial Inclusion
While impressive disbursements are indicative of growth, the heart of the fintech lending revolution lies in digital loans. By leveraging technology, fintech lenders can reach underserved populations, offering loans to those who were previously excluded from the traditional banking system.
Take the case of home loan lending: Leading banks and other financial institutions still lack at least a branch in the remotest areas of the country, and this is where the role of fintech lenders comes into play.
These players make use of advanced technological solutions and offer something on the lines of digital loans — thereby spreading the growth of financial inclusion, even to the regions far away from the glitter of tier-1 cities.
Fintech lending platforms are filling this void (of access to formal home loan lending services) by providing easy access to credit through a seamless digital process. Cutting-edge technology is abundantly utilised by these players to provide differentiated financial services across consumer application journeys as well as KYC, identity, and eligibility checks.
Borrowers can apply for loans, receive approvals, and access funds with just a few taps on their smartphones. In short, the need to travel to a bank and wait in long queues to put in your home loan application is now made simpler, thanks to fintechs embracing the innovation.
Legacy Systems vs. AI-Powered Fintech Solutions
A significant factor contributing to the fintech lending industry’s success is the replacement of archaic legacy systems with robust, AI-powered, and data-driven solutions. Let us take a look.
Machine Learning Algorithms: Fintech companies are using artificial intelligence and machine learning algorithms to assess credit risk more accurately. These algorithms analyse vast datasets to make quick and precise lending decisions, reducing the time it takes to process loan applications.
Alternative data sources: Traditional lenders often rely on limited data points, such as credit scores, to evaluate borrowers. Fintech lenders, on the other hand, incorporate alternative data sources like social media activity, utility bill payments, and even smartphone usage patterns to assess creditworthiness.
Blockchain for security: Blockchain technology is being employed to enhance the security and transparency of loan transactions. It ensures tamper-proof records and eliminates intermediaries, reducing the risk of fraud.
Digital identities: Fintech solutions are pioneering digital identity verification, making it easier for borrowers to prove their identity without physical documents. This streamlines the application process and enhances security.
Automated loan origination: Fintech lenders are automating the loan origination process, from application to disbursement. This reduces human error, speeds up approvals, and enhances customer experience.
These fintech solutions are not only more efficient but also offer a more tailored and inclusive approach to lending. Borrowers benefit from faster decisions, competitive interest rates, and a higher likelihood of approval.
Navigating regulatory challenges
While the sector is undoubtedly making strides, it is not without its regulatory challenges. One of the fallouts of the Covid-19 pandemic has been higher regulatory scrutiny and the digital lending regulations introduced by the Reserve Bank of India in September 2022 to promote responsible lending practices.
The recent rise of fake loan apps which steal user information and use illegal recovery practices have also led to crackdowns by regulators. As a result, these lenders must ensure they comply with anti-money laundering (AML) and know your customer (KYC) regulations.
Concerns about consumer protection are paramount. The use of personal data in credit assessments raises concerns about data privacy. Regulators are also focused on safeguarding borrowers’ interests, ensuring fair lending practices, and preventing predatory lending. The digital lending guidelines require regulated entities to store only minimum customer information and integrate technology standards and cybersecurity measures to protect data privacy.
The industry’s growth and innovation are undeniable. Increasing disbursements, driven by digital loans, are shaping a future of financial inclusion. However, it is essential to address regulatory challenges carefully to maintain trust, protect consumers, and ensure the sustainable growth of this dynamic sector. As fintech lending continues to disrupt traditional lending, finding the right balance between innovation and regulation will be key to its continued success.
(The author is the CEO and co-founder of Basic Home loan)
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