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Unlocking Opportunities For Digital Lending
Fintech startups have shown the way to promote digital lending. It is now time for the bigger, more influential and resourceful players to follow our lead and leverage the opportunities available in this space.
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Everyone seems to be talking about digital finance these days. Whether it’s the Finance Minister highlighting digital finance during her first Budget speech or your kirana delivery boy asking if you’ll use Paytm to settle your bill, digital seems to be the latest money-related trend in India. But ask most people what digital finance is, and chances are they’ll begin and end with digital wallets. Is that all digital finance is truly about? Most average citizens certainly think so, because that’s what most of us see offered by startups, big banks, and even the government. But there’s so much more to digital finance than just a convenient payment tool/mechanism. For one, it could be the most important thing that’s happened to lending.
Digital lending is a relatively unknown aspect of digital finance, and an untapped space, estimated to be worth $1 trillion in the next five years per a Boston Consulting Group (BCG) report. Yes, that’s a huge opportunity, but so far, only a few fintech startups seem to be taking advantage of it.
How is digital lending different from conventional lending? At its most basic, it allows the entire lending process, from application to disbursement, to be done digitally. That means minimal paperwork, and savings of time and money for the same. Perhaps more important, it also calls for investments in technology and digital tools to replace slow old-school manual intervention.
Hence, it is hardly surprising that fintech startups took to this space first, offering hassle-free lending to companies that could not afford the time and red-tape involved in a conventional loan. Banks followed suit, and today, though relatively unknown to the average user on the street, digital lending is a key focus area in the financial services space.
Consumer borrowing and MSME credit are two major markets where digital lending could see explosive growth. Fintech startups are focussing on these two areas with products tailored to the needs of the market, from experimenting with peer-to-peer lending for individuals to offering collateral-free export finance for SMEs. While the potential is evident, there’s a lot that needs to be done to fully realize it. I believe there are two broad areas that need attention -- policy and technology.
The government would do well to remember the line famously attributed to Bill Gates: “Banks don’t matter; banking does.” Rather than putting restrictive regulations in place that end up stifling borrowing, the government needs to look at what works for the greater good. Easing norms on NBFCs could be a good place to start, allowing these firms to explore the digital space, grow their market, and reach out to a wider customer base.
The government also needs to look at how current economic and tax policy decisions can impact digital finance going forward. So far, fintech companies have taken the lead in offering innovative lending solutions, while banks have been constrained by restrictive rules on collateral requirements, options for credit offerings, etc. Easing these regulations could be a good place to start for formulating policy.
The government’s enabling of digital finance platforms (through the UPI interface, for instance) has been good so far. But there’s still more to be done to give digital lending an impetus. Blockchain technology is likely to be a key focus area. Distributed ledger technology, popularly called blockchain, is unfortunately only well-known right now for one of its uses -- crypto currency such as Bitcoin. With the government and regulators making a strong case against such currency, it looks like the enthusiasm for the underlying technology has been dampened as well in the Indian market. That is unfortunate, because blockchain can change the face of digital lending as we know it, allowing faster and simpler digital transactions with greater security.
The good news, however, is that the government and large financial institutions have recognised the potential of blockchain tech. In the coming months, some clarity on the legal position of blockchain and its applications could be of great use, as well as greater digital education among all stakeholders in this space.
That brings me to the next big area that needs attention -- digital literacy in the corporate sector. While digital literacy overall has been given significant attention, there needs to be specific awareness-raising and training given to companies to understand the role digital finance can play, and the advantages offered by adopting it.
All these focus areas and steps are familiar to those of us in fintech. Fintech startups have shown the way to promote digital lending. It is now time for the bigger, more influential and resourceful players to follow our lead and leverage the opportunities available in this space.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.