The Future of Lending in a Post-COVID World

As it becomes increasingly clear that COVID-19 remains a potent threat, health and hygiene issues are assuming greater importance for borrowers. Digital is becoming the preferred mode of borrowing, due to the higher risk of contagion associated with in-person interactions. As a result, digital penetration is poised for a significant jump as customers begin using smartphones to share KYC data and conduct financial transactions online. 

In the current scenario people without credit cards and access to or eligibility for formal loans, may realise that the need for credit can arise suddenly. In such cases too, people will explore digital platforms for procuring loans from lenders offering loans to new to credit customers. 

Diverse Drivers and Challenges

While demand for credit will probably grow, new challenges have emerged for lenders. As job losses, furloughs and salary cuts keep rising, delinquencies have been mounting. Therefore, wary traditional lenders are tightening lending norms while restricting or suspending loans to certain categories of borrowers. 

Having seen growing defaults during COVID-19, many lenders are making the underwriting process more stringent. The Supreme Court’s moratorium on loan repayments might have an extended effect on repayment behaviour of borrowers, who may expect relief once again, should there be a second wave of the disease, just as it happened after farm loan waivers. In such scenarios, defaults and delinquencies can rise in future, further impacting delinquency rates. 

Against this backdrop, lenders will need to deploy digital tools such as data analytics and artificial intelligence in gauging the risk profile of prospective borrowers. While new-age lenders are already using digital tools, traditional players have still not fully embraced them. 

Yet, for retaining relevance in the current conditions, digital technologies are imperative for providing prospective borrowers with a seamless and speedy experience from application to loan closure. Digital natives will enjoy a tremendous competitive advantage over traditional lenders when it comes to swift loan disbursals, especially to smaller borrowers. Additionally, by periodically reviewing customer data using analytics, lenders can remain up to speed on any changes in the risk profile of borrowers.  

The authorities have also been encouraging a digital first approach by creating an enabling environment via select policy initiatives. By introducing an Aadhaar-based video KYC or customer identification process, the RBI has been facilitating a more reliable, inexpensive mode in lieu of field verification of customers during on-boarding. Banks and other lenders, formal and informal, can all adopt this mechanism, promoting faster processing of loans during the COVID-19 slowdown as well as thereafter. Lower on-boarding and loan disbursal costs support greater penetration into new lending segments, benefitting lenders and borrowers. 

Mutual Benefits

Indeed, digital lending benefits both borrowers and lenders by minimizing the time and effort required in closing loan applications. In the long run, digitally-driven lending can expand overall loan volumes. Also, loans under process can come down dramatically, unlike traditional lending mechanisms. 

As per a Boston Consulting Group report, four fundamental drivers are augmenting digital lending operations. To begin with, consumer behaviour has been undergoing a dramatic change due to the shift towards digital, which has been fast-forwarded by the pandemic. Secondly, the mushrooming of digital devices and an explosion in data volumes have triggered swift technological changes. Thirdly, the regulatory ambience has become more favourable for digital. Fourthly, both traditional as well as non-traditional lenders are innovating their business models to remain competitive. 

The biggest benefit of digital lending – while keeping the cost of lending lower, is that it allows greater and faster scalability. Besides, through its emphasis on utilizing digital tools during due diligence and periodic reviews of customer risk profiles by analysing conventional and non-conventional data sources, it reduces lenders’ risks, helping them serve customers better. 

Meanwhile, lenders need to place greater emphasis on gauging the long-term profitability of existing customers through behavioural analytics. Credit bureau data is useful in gauging creditworthiness of new customers. However, for existing borrowers, by using multiple alternate data points to build machine learning models, lenders can keep tweaking their credit assessment in real time and thus maximize the value of a customer by determining the appropriate amount to lend.

Consequently, customer satisfaction and relationship value also increase. The benefit of such practices that help in long-term customer retention is that one doesn’t need to keep educating borrowers about the lenders’ brand. 

In a nutshell, although the coronavirus pandemic will be a temporary threat, the long-term implications of the accelerated move to digital will continue benefitting both borrowers and banks as well as other lenders.