India's digital lending volume could be $1 trillion over the next five years

The lending market in India remains relatively untapped, and the development of this domain happens to coincide with the rapid digitalisation of the country, which, according to management consultancy Boston Consulting Group (BCG), will carve a digital lending space worth approximately $1 trillion over the next five years.

India will have 850 million people online by 2025, and while new online consumers have demonstrated limited scope in their online activity, it is only a matter of time before this access allows the online sphere to increasingly permeate various aspects of daily life, most significantly the domain of financial activity.

In terms of day-to-day financial transactions, the tech industry is already actively developing methods to bring them online, and the transition should not be a particularly challenging one, given the momentum that Paytm and other such applications have gained in recent years.

Consequently, as the population warms to the idea of online financial activity, banks are likely to roll out the next step in online finance – digital lending. According to BCG, a number of trends can be expected in the Indian market over the next year as the country adapts to this new scenario.

Incumbent lenders with rigid established infrastructure will look to collaborate with smaller, more flexible, and more tech savvy firms ­– which will, for their part, look to develop a customer base of their own and challenge the incumbents. Fintech organisations will thrive due to the demand for new operational models, as will data analytics firms.

The entire front-end experience of applying for a loan will change for the better, as automated algorithms based on huge data repositories will enable the return of a loan decision within minutes, and, as with a number of other sectors, the internal power dynamics within a lending organisation will shift from credit specialists to techies.

Naturally, the cyber risks that come with online finance can be devastating, which makes digital lending a sensitive issue in the regulatory sense. Major markets across the globe have been developing complex regulatory frameworks to simultaneously facilitate the expansion of digital lending and ensure that the data and funds exchanged therein remains protected.

Examples of this include the Open Banking Act in the UK, which offers a standard format in which financial data can be shared and exchanged, which not only makes it easier for applicants to input information, but also allows inter-industry exchange of data that can be leveraged to further advance the Fintech domain, for instance.

The Second Payments Services Directive introduced in the EU facilitated digital payments directly from a cutomer’s account, which has the potential to significantly cut costs in the transactions and credit risk assessment domains. India has its own regulatory policy for digital lending, known as India stack.

The ‘stack’ is a list of automated procedures from end to end of the loan application that would enable the sanction of a loan and its disbursement in 30 seconds. Following the loan request, the stack includes an automated electronic know-your-customer process by immediately drawing up the Aadhar number.

An automated check of previous credit behavior follows, which then takes us into the processing stage, wherein the fee can be paid through an online bot and the rules are verified through an automated system, after which the bot also scans the online ecosystem for additional data on the customer, such as income levels and surrogate data. Finally, disbursement documents are generated online, a digital signature is obtained from the customer, and the sum is transferred directly into the customer’s account, all within 30 seconds.

The stack is expected to drive digital lending in the country through the roof in the near future. Over the next year, BCG estimates that the total lending volume will increase from $75 billion to $110 billion, followed by rapid growth up until 2023 that will take total digital lending up to $350 billion, or nearly 50% of total lending in the country. Between now and 2023, $1 trillion will be digitally disbursed, as per BCG estimates.