Digital Lending: Is It Alternative Lending Revolution?

Abstract

Digital lending is new and emerging area in the field of lending or credit. Lending through digital platform, right from receipt of loan application to disbursement of loans, is known as digital lending. Digital lending gains momentum as a result of employing new technologies, new credit scoring algorithms and inclusive approach. This article focuses on framework, working mechanism and growth of digital lending in India.

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599
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Digital Lending: Is It Alternative Lending
Revolution?
Ravikumar.T, Murugan.N, Suhashini.J
Abstract: Digital lending is new and emerging area in the field of lending or credit. Lending through digital platform, right from receipt of loan application
to disbursement of loans, is known as digital lending. Digital lending gains momentum as a result of employing new technologies, new credit scoring
algorithms and inclusive approach. This article focuses on framework, working mechanism and growth of digital lending in India.
Index Terms: Digital lending, FinTech, India, Alternative lending.
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1. INTRODUCTION
Over the last few years, Financial Technology (FinTech) has
emerged as game changer in the financial segment. FinTech
has completely redefined the way in which business has been
carried out. Financial Technology is basically fusion of finance
and technology to provide financial solutions which are
considerably more efficient than those financial solutions
provided by traditional financial institutions. However, FinTech
is not a replacement for traditional banking system. But,
FinTech is a facilitator for effective banking services. Most of
the banking services are now being provided with the comfort
of new technologies such as machine learning, big data
analysis and algorithms.Traditional banking system has an
integrated approach towards banking business. Traditional
banking system performs primary functions of collection of
deposits and lending as well as secondary functions such as
remittances, point of sales, insurance and so on. But, FinTech
enabled firms, mostly start ups; focus on certain banking
functions instead of adopting integrated approach. Few
FinTech firms focus on digital lending and some other firms
focus on payment services, remittances and insurance.Digital
lending is also known as alternative lending. Alternative
lending refers to digital platforms that provide low-cost loans,
which are simple to obtain for the large unaddressed market
segment. Alternative lending is a growing industry for digital
lending aimed at different borrowing needs, including
consumer loans, Small Medium Enterprises loans, working
capital loans, and payday loans among others. It serves as a
relatively less volatile asset class for retail and institutional
investors. The industry primarily consists of digital lending
platforms and enablers who facilitate such platforms, such as
alternate credit scorers and white label services. These
platforms connect lenders, seeking higher returns than banks
currently offer, with customers seeking fast, short-term
loans.Digital lending has a larger opportunity in India and the
total retail loan which could be distributed digitally in next five
years – till 2023- would be over $1 trillion (Boston Consulting
Group, 2018).
2 STATEMENT OF THE PROBLEM
In the traditional banking and other formal financial system,
lending happens through offline. The entire process of lending
in the traditional system is, right from identifying prospective
borrower to sanctioning of the loan or credit, carried out
manually which is time consuming process and tiresome for
the borrowers. The banks use traditional credit scores such as
CIBIL credit score to determine the credit worthiness of the
borrowers. The traditional credit scores have certain limitations
and they do not consider the facts presented by the borrowers.
Further, the bankers provide loans only to those people who
can access the banks by having bank accounts and to those
customers who have ―Good Credit Score‖. As a result, the
individuals and the businesses do not have access to the
banks irrespective of larger number of financial inclusion
initiatives of the Government of India and those who are short
of convincing credit scores become financially excluded. Thus,
the traditional banking system makes the individuals and the
businesses financially excluded and it has cumbersome and
time consuming lending process. These gaps are now filled by
digital lending. Digital lending is vey speedy in nature and
loans are approved in comparatively lower time period by
using technology and alternative credit scores at affordable
rate of interest. Some digital lenders sanction the credit in a
minute after submitting the required documents and the digital
lenders provide variety of credit to meet diversified needs of
the individuals and the businesses. Digital lending has
revolutionized the lending function and it has emerged as
alternative to the bank credit. Therefore, it is essential to study
about the emergence of digital lending and its growth in India
as well as at the global level as an alternative to the bank
credits.
3 CONCEPTUAL FRAMEWORK AND WORKING
MECHANISM OF DIGITAL LENDING
There is a paradigm shift in the field of lending. Lending is
undergoing a fundamental transformation from traditional 3-6-3
formula to 3-1-0 formula. 3-6-3 formula is more prevalent in
the traditional banking which means ―raise deposit at 3
percent, lend at 6 percent and play golf after 3 PM‖. But,
FinTech powered Digital lending firms practice the new global
formula 3-1-0 which refers ―3 minutes to decide, 1 minute to
transfer the money and 0 human touch‖ (Boston Consulting
Group, 2018).
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 Ravikumar.T, Associate Professor, Dept. of Management Studies, Christ
University, Hosur Road, Bengaluru.
 Murugan.N, Professor, Dept. of Management Studies, PSNA College of
Engineering and Technology, Dindigul, Tamil Nadu
 Suhashini.J, Assistant Professor, Dept. of Management Studies, PSNA
College of Engineering and Technology, Dindigul, Tamil Nadu

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TABLE 1
DIGITAL LENDING MODELS
Online
lender
Financial Service Provider (FSP) that provides end-to-end digital
lending products via a website or mobile application.
P2P Lender
Digital platforms that facilitate the provision of digital credit between
many borrowers and lenders, typically playing an ongoing central
role in the relationship between these parties.
e-
Commerce
and Social
Platforms
Digital platforms wherein credit is not their core business, but that
leverages their digital distribution, strong brand, and rich customer
data to offer credit products to their customer base.
Marketplace
Platforms
Digital platforms that originate and match one borrower with many
lenders for an origination fee; the lender and borrower then enter into
a bilateral agreement.
Supply
Chain
Lender
Non-cash digital loans for specific asset financing, invoice financing,
or pay-as-you-go asset purchase within a supply chain or distribution
network
Mobile
Money
Lender
Partnership model wherein lenders work with mobile network
operators (MNOs) to offer mobile money loans to their customer
base, leveraging mobile phone data for scoring
Tech-
enabled
Lender
Traditional FSPs that have digitized parts of the lending process,
either in-house or through partnerships.
Digital lending is the process of offering loans that are applied
for, disbursed, and managed through digital channels, in which
lenders use digitized data to inform credit decisions and build
intelligent customer engagement. Digital lending takes many
shapes and forms – from automating small pieces, to a fully
digital lending process, from acquisition to renewal (ACCION,
2018).Digital lending isn’t just doing the same thing better, but
rather creating something new. It implies an end-to-end
process of developing and delivering data-driven financial
products that are applied for, disbursed, and managed through
digital channels (ACCION, 2018).Alternative lending is an
asset class borne of bank disintermediation and technological
innovation (Ken Michlitsch, 2018).Thus, Digital lending is a
lending process which provides speedy and smart credits to
the borrowers using internet, technology, artificial intelligence,
big data analytics and alternative credit scoring algorithms.
There are three core components of digital lending which
include use of digital channels, use of digitized data and focus
on customer experience and engagement (ACCION, 2018).
The digital lending ecosystem is complex and evolving. Around
the world, digital lending models are characterized by distinct
market structures, regulatory environments, and customer
needs. Some players offer end-to-end digital solutions, while
others focus on a specific component of the lending process
and leverage partnerships to supplement their models. The
major models of digital lending are presented in the Table
1.Due to complex ecosystem and technological and financial
innovation, it is very difficult to classify the digital lending
models strictly. A customer journey of Digital lending is
presented in the following Figure – 1;
Fig.1 Customer Journey of Digital Lending
4 WORKING MECHANISM OF DIGITAL
LENDING
Digital lending is rapidly growing sector in financial service
industry all over the world and in India. The contributors such a
growth are usage of internet, technological advancements and
big data, digital ecosystem, innovative models, time saving
and customer friendly approach.
a.Usage of internet
This is a digital era. Behavioral pattern of people across the
world has become ever changing. Indian population is
extensively using online transactions in these days which are
fuelled by e-commerce websites, digital push of government,
cashless economy and so on. In 2014, only 7% of urban
people in India engaged in online purchases and in 2018, this
percentage has increased to 30% (Boston Consulting Group,
2018).
b.Technological advancements and big data
Technological advancements like artificial intelligence, black
chain technology, cloud computing, big data and analytics
have remodeled the way the businesses are undertaken today.
These technologies brought new Financial Technology
companies in to existence. One of such Financial Technology
companies is Digital Lending companies.
c.Digital ecosystem
Along with customers’ behavior, it is very essential to have
favorable digital ecosystem for the development of digital
lending. India has pioneered in creating conducive ecosystem
for development of FinTechs and digital transactions. Digital
lending has grown significantly as a result of digital ecosystem
through various initiatives like Aadhar, Unified Payment
Interface (UPI), Bharat Bill Payment System, cashless
economy push and Goods and Service Tax (GST).
d.Innovative Models
FinTech companies revolutionized the financial service
industry in general and the lending sector in particular through
innovative business models like point of sales based lending,
invoice discounting exchanges, bank and FinTech partnership
like capital float, market place lending and bank led digital
models.
e.Time saving and customer friendly approach
Availing loans through digital way is not cumber some and
tedious. But, In fact, digital lending is very simple and smart
lending process. It has advantages in terms of time, cost and
approach. Digital loans are processed and disbursed using the
following mechanism;

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Fig.2 Digital Lending Process
5 GROWTH OF DIGITAL LENDING IN INDIA
In the beginning of internet boom, millennial, male and metro
residents were the users of internet in India (Boston
Consulting Group, 2018). But, this scenario has gone and all
kind of people across India use internet today. According to
research work of Boston Consulting Group on consumer
behavior across purchase journey, 50% of loan seekers with
internet access buy their loans online. Further, the research
says that growth of digital infrastructure in India and readiness
of the Indian consumers will drive the growth of digital lending
exponentially. It is estimated that the total value of digital
lending in India will exceed $1 trillion over the next five years
(Boston Consulting Group, 2018). Small Medium Enterprise
loans and personal loans are the leading digital loans of the
customers followed by home loans.Technology is now allowing
financial services providers to increase financial inclusion in
India. The cell phone has become a differentiator, as is having
an Aadhaar number. The number of Indians having either a
cell phone or an Aadhaar card is now one billion. Armed with
one or both of these two enablers, India's unbanked can now
hope to access the benefits of the formal financial
system.Although digital lending makes remarkable impact in
the space of lending in India, there are certain constraints for
growth of digital lending. The following initiatives may improve
scope and growth of digital lending;
a. Increase the limit of digital loan amount through One
Time Password based e-KYC from Rs 60000 to
5,00,000
b. Amend section 138 of Negotiable Instruments Act, 1881
to accommodate digital signature (e-sign) of loan
documents
c. Permit e-mandate for collection digital loans disbursed
6 CONCLUSION
This article focuses on digital lending, its conceptual
framework, growth and factors contributing digital lending.
Digital lending revolutionized the field of lending across the
world as well as in India. Digital lending is powered by
technology and new business models. Digital lending is started
to emerge as new alternative to traditional lending due to its
cost effective, less time consuming and inclusive approaches.
Digital lending is in fact an alternative to traditional lending
because even the financially excluded people can access
digital lending firms to avail loans and digital lending firms
provide loans, mostly small and medium ticket loans, to such
excluded people and their organizations using alternative
credit scoring methodology.
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