Lending and borrowing money is critical to a country’s financial health. Banks have traditionally played the role of prime lenders in India, disbursing loans for both commercial and personal purposes. However, the extensive due diligence and long processes resulted in individuals turning to the unorganized sector or traditional moneylenders who charged exorbitant interest rates. In recent years, however, the lending market in India has developed into a dynamic playfield of various non-banking financial companies, fintech enterprises, and digital lending platforms.
The rise of personal loans
Since the last decade, Indian banks were faced with the issue of non-performing assets (NPA). To address this NPA crisis, the government motivated banks to change their lending behavior. Consequently, banks shifted from corporate lending to the personal loan category, where the risk of default was reduced. In other words, a large number of small personal loans were preferred over a few big loans to corporates. This has been visible in the shrinking share of bank credit to the industry while retail credit witnessed an upward trend. This markedly improved the NPA situation while the corporates gravitated toward the debt market for their credit requirements.
Even though India’s consumer spending is making a strong comeback, income cuts during the pandemic and rising costs due to inflation necessitated the financing of personal consumption through loans. Additionally, expenditure during the festive seasons usually leads to soaring demand for personal loans, with banks and NBFCs offering cashback offers, pre-approved loans, no-cost EMI offers, and attractive interest rates. The consumer lending market is set to expand even more with new digital lending platforms and online credit options. Partnerships between digital lenders and e-commerce platforms are also an emerging trend in the sector.
Digital lending under lens
India’s digital lending sector is a booming space that includes banks and financial institutions under the Reserve bank of India’s (RBI) regulatory framework and certain loan service providers (LSPs), and digital lending apps (DLAs) outside RBI’s purview. The sector is swamped with business lending fintechs, embedded finance platforms, P2P lending platforms, and the rapidly emerging Buy Now Pay Later (BNPL) among others. However, several ethical and technical issues have been arising between borrowers and lenders due to regulatory loopholes in this emerging sector.
RBI aims to control the growth of unregulated digital lending players to ensure compliance with data and privacy protection. The most favorable change addressed was weeding out third-party intermediaries in the loan disbursal process. As per the new guidelines, the loan amount should be directly disbursed from the lender’s account to the beneficiary’s account. Another proposed reform ensured increased transparency regarding the cost of the digital loan for the borrower. This restructuring might induce more consumer confidence and trust in digital lending platforms in India and pave way for a well-functioning digital lending ecosystem in the country.
