Brief History of Digital Lending:
India has become the home to digital lending startups that have pumped up credit in the consumer market due to urbanization and formal employment. As reported by Inc42 in 2020, there are 5.6 million credit cards issued every year by which it is obvious that the market for credit is on the brink of a revolution.
On the other hand, the country is marching towards digitalization along with the pandemic, leaving the scenario quite advantageous for digital lending startups to exercise the best lending practices.
The traditional lending process that is being practiced by Banks and NBFCs has the following disadvantages which is expected to be solved by Digital Lending.
- Longer setup time
- Cumbersome manual operations
- Scalability to try different financial products
- Handling Omni Channels
Other than this, there are also a few things that Digital Lending can do to change the landscape of lending in the financial sector. By capitalizing on this, the lenders, borrowers as well as the financial institutions experience a plethora of benefits.
The Power of Digital Lending
Digital Lending predominantly focuses on the lenders and borrowers going through the digital lifecycle of financial products and services. The process has eventually led smaller banks and NBFCs to witness better customer experience, make quality decisions, save costs and reduce the turnaround time with loan application and approval. On an average, corporate credit applications for SMEs can be processed in a few working days with digital lending while the process could take 3-4 weeks without.
Further, the practice also increases revenues for smaller banks and NBFCs, which is proportionate to increased customer satisfaction.
However, digital lending is limited to risks like operation, policies, credit decision, analytics and technology that puts things together.
Looking at the bright side of the process, how do banks and NBFCs get started? What are the practices and principles involved?
Demystifying Digital Lending Practices
Be it B2B or B2C, conventional lending is always known for long paperwork and ambiguous practices. Digital lending has deciphered the entire process by providing faster help for credit filing, approval of application and disbursement of loan with no long waits. Sounds incredible, doesn’t it?
The Digital Lending ecosystem is built by seamless technology that is digitalized, while keeping the borrower’s financial information secured.
The superfluous human interaction is one of the pain points of old-school lending. Digital lending uses technology to verify documents, assess the borrowers’ credit worthiness, process loans and disburse the approved amount. This type of credit model uses the borrowers’ personal and financial data for quicker credit decisioning and loan disbursement.
The new-age digital lending process cuts down human interaction. The process is online, paperless and shortens time taken for collateral review. Here, the chances for impartial loan decisions are also less and the loan is granted even without seeing the borrower / applicant.
Between the approval and disbursal stage, the loan disbursement time with digital lending is hardly 30-45 minutes. Traditional lending achieves this in 3 to 5 working days.
The data-driven digital lending process uses resilient and reliable SSLs(Secure Socket Layers) for encryption to guard the borrowers personal and financial information from digital intruders.
Further, to optimise this, the RBI has also alarmed users against unfair lending practices and unfamiliar lending platforms that assures faster loan disbursement as the complaints on digital lending apps has spiked up in recent years.
But, how to do it prodigiously?
There are 5 key principles of digital lending that banks and NBFCs should follow to achieve effective digital maturity.
P1 – Making your organization digitally ready
Are you already rolling out plans to digitalize the lending process in your bank or NBFC? Then, allowing some time for your organization to be prepared would be the first step.
For instance, KYC submission is one thing for which a customer would stop by physically to your functioning branch. Your employee should be trained or familiar with the digital product that is in use. Otherwise, this can impact your customer experience which reflects greatly on your business and revenue. It can be simplified by bringing in a e-KYC process through technologically advanced software like CloudBankIn. Your feet-on-street must take minimal effort to learn the digital lending tool/process and do the verification process in no time.
P2 – Developing a sound Digital Lending strategy
In order to stay relevant in the lending industry, financial service providers should adapt to latest technology and have an adroit strategy. This is achievable by having a Supportive CRM and a Structured Operational Process.
The CRM you choose should possess the following attributes.
-To provide a solution on-the-go.
-Processing of documents online.
-Reduced turnaround time.
-Real-time information tracking
-Notifications and reminders
- Analytical Response:
-Customer’s financial data
To sum up, the CRM should ease document processing online, give instant updates, and be capable of providing the relevant lending opportunities for the end customer based on all possible financial data available.
The Operational Procedure is encapsulated below.
- Credit Application:
The Credit or loan application is the preliminary process demanding API integration from Credit Bureaus which is a must-have functionality of your digital lending application.
- Customer Onboarding:
Today, customer onboarding is done through Video KYC / eKYC to have a reduced turnaround time by financial services providers (Banks / NBFCs).
- Loan Underwriting:
The system should be capable of underwriting loans from several demographics like segment and geography. This can help you with data like customized interest rates for customers with previous lending history. Leveraging AI and machine learning tools have made this possible.
The disbursement time is ramped up with a technologically inclined lending system.
- Customer Relationship:
Existing customers pave more room for cross-selling opportunities. The system you build should be educating the customers with latest updates, products and offerings.
Click here to read more about how the process happens at a lending tool level.
P3 – Optimizing digitalization for different demographics/client base
Optimizing digitalization for varied demographics is a customer experience strategy. Before turning your organization / process into a semi-digital or fully digital one, make sure the change is leaving a positive impact on all categories of your customers across geographies.
This has further been elaborated in a blog interview with Prashant Thakken, Executive Director & CEO of Centrum Microcredit Limited that provides a panoramic perspective of the microcredit market in rural India.
To quote a few examples: 1. A new-age borrower looks for a straight-forward and personalized lending solution. This can further be aided by a self-help desk for queries to have an increased customer engagement.
Leveraging vernacular language for the platform improves accessibility by customers in the rural and suburban areas. This is also another viable solution that can give you an edge over your competitors.
P4 – Implementing digital lending while keeping human touch
In simple terms, this implementation is referred to as tech and touch strategy. Organizations and key stakeholders should be considering the following before getting into the digital lending ecosystem.
1. Customers in localities with poor connectivity and lower smartphone penetration might require more physical contact for loan or credit services.
2. Customer’s willingness and ability to use a digital product for lending services.
3. Size of the loan or credit availed by a customer is also to be considered. With a bigger sum, physical disbursement might be risky for which a customer’s digital savviness is important – usage of digital banking per se.
Even before setting up a digital lending system, a lender should be able to decide on going digital with a mobile or desktop application based on the customer attributes like age and usage.
The latest news from RBI on evaluating fair practices in Digital Lending in India might also help you strike a balance between human touch and technology.
P5 – Enabling partnerships in Digital Lending
A few organizations might take time for digital maturity due to diverse factors. Under such circumstances, partnering with Fintech startups to set up a digital lending ecosystem is advisable. This enables the execution of a specific functionality flawlessly and reduces the risk of failure of a digital product in the financial services sector.
Colending is one of the viable options to banks and NBFCs to come in alliance with to finance a loan. Here, NBFCs take care of the loan origination system and process while a major chunk of liquidity is staked by the banks. Having said that, there are both risks and rewards associated with colending which is being shared by both the parties.
The year 2021 is all set to bring revolution across all sectors while the financial sector is no exception. While paperless loans and video KYC are considered to be on the cliffs of digitalization of the finance sector, experts still say there’s more to it.
However, there is no hard and fast rule or formula to adapt the best digital practice. Are you prepared to welcome the change?
If we could take a ‘yes’, then you are one step closer to doing it the Habile way!