Lending in digital mode

Today, digital lending market is one of the fastest growing markets
Lending in digital mode
Specifically speaking, the traditional way of obtaining a loan has always been full of hassles for the customers as they are made to visit the branch physically, be in queue and comply with various nature of formalities." [File] Pxhere [Creative Commons]

Even as banks have been on the forefront to run special multimedia advertisement campaigns about their loan schemes to woo customers, the fact is that getting a loan is not so easy as is depicted through these publicity campaigns.

The loan schemes are loaded with a host of formalities, especially the paperwork required to process the loan application. It is a common scene at a bank branch where one would find a good number of loan aspirants succumbing to the paperwork and leaving the idea of obtaining a loan midway.

Specifically speaking, the traditional way of obtaining a loan has always been full of hassles for the customers as they are made to visit the branch physically, be in queue and comply with various nature of formalities. Precisely, the traditional system has been time consuming.

Now the scenario is changing fast, where, among other things, systems and procedures driving the banking system are undergoing transformation with technology playing the crucial role.

In other words, with the advent of technology, the banking services have witnessed dramatic reach where the customers now avail products and services at the click of a button, that too without visiting the bank branches physically.

However, the lending system didn’t completely fall in line with the power of technology. Despite appropriate technology in place, the banks didn’t promote digital systems of lending and continued to bank upon traditional systems in processing the loans.

It was only after the outbreak of a coronavirus induced pandemic which left no option with the banks but to integrate the technology fully into their operations. Today we can measure that the impact of COVID-19 on the financial system has been huge.

Changes triggered by the pandemic-induced lockdowns , shutdowns and mobility restrictions to curb the spread of the virus have been driving the growth story of all finch types which among other things include one of the core operations of the banking system - the lending.

During the period of over two years of the ongoing pandemic, lending is fast moving on the digital platform. Today, digital lending has become a buzzword in the banking system as people have fast become immune to the digital transactions, where they physically avoid visiting their bank branches and prefer cashless transactions.

Precisely, the digital lending market has emerged one of the fastest growing markets. Though the main players of the market are finch startups, neo-banks and non-banking finance companies, commercial banks too are realigning their traditional lending mechanism to offer digital lending platform option to the customers. reports quoting reliable data state that in 2019, the volume of digital lending market in India was nearly 110 billion dollars and market watchers peg its value around 350 billion dollars by 2023.

We cannot overlook the fact that the proliferation of smartphones is playing its own role in creating a suitable environment for digital lending. In other words, the growing number of smartphones has led to greater demand for digital lending solutions for faster and hassle free processing of loans from anywhere. In today’s environment, a safe and secured digital lending platform is inevitable when it comes to customers’ expectations.

Market is flooded with lending apps. However, reports are continuously surfacing in the media about the huge network of unauthorized and unregulated lending apps, which are clandestinely operating outside the ambit of the radar of any regulatory authority in India.

They have been lending money outside the formal financial system of the country. Even as their loan appraisal and disbursal is quick, almost real-time, they lose no time to invoke their aggressive recovery tactics on a small miss in repayment.

Notably, these lending apps download contact lists, photos and other data from borrowers’ phones and the same is used against the borrower in case he defaults. There are chances that this data may be misused even when the borrower repays the money within the stipulated time.

There are, of course, legal lending apps also. They work with leading banks and non-banking finance institutions and follow proper norms, These kinds of apps, working on commission basis, manage loan agreements with banks and customers.

What’s the current scenario of these digital lendings?

Emergence of lending apps and the response they have been getting from people also speaks about the credit gaps which still exist in the formal financial system. In other words, our banks and financial institutions still have a long way to go to bridge the credit gap which has forced their customers to bank upon unauthorized lenders such as lending apps.

Despite the huge push to financial inclusion in the country, the basic impediments to the formal lending structure continue to remain too clunky, time-consuming and costly to satisfy the vast demand for small unsecured instant loans.

However,These modern lending channels are called loan sharks and are illegally operating. They are as good as moneylenders who use coercive measures in recovery of loans.

These new-age online lenders make best use technology to lure borrowers, especially the young ones, to loans at exorbitant rates of interest. Once the borrower misses EMI date, these lending apps quickly resort to naming and shaming the defaulting borrowers in public, more particularly among their contacts.

They often harass family members of their borrowers just at the first sign of loan default.

Who regulates these lending apps?

This is an informal way of financing and currently there are no regulations in place to put a check on these lending apps. Their structure and existence is not identified and are referred by experts as fly-by-night operators.

However, afewdaysbackthe Reserve Bank of India Governor Shaktikanta Das said on Thursday that the central will soon come out with regulatory architecture for digital lending platforms.

“I think very soon we will be coming out with a broad regulatory architecture, which should be able to address the challenges that we are confronted with regard to lending through digital platforms, many of which are unauthorised, unregistered and, should I say, illegal,” Das said while delivering a lecture on - Indian Businesses (Past, Present and Future).

Why do people fall into their net?

Mostly, they send messages and emails in bulk and lure gullible people in the name of instant loans with no documentation. They credit the loan amount instantly in the account of the borrower once he/she downloads the app and applies for the loan.

This quickness in disbursal of the loan and that too without any KYC documentation and other formalities which otherwise are required at a bank or a financial institution, tempts an individual to take the loan.

Notably, the Reserve Bank of India (RBI) has urged citizens to be wary of unauthorised digital lending platforms and mobile apps for taking loans and has expressed concern on high-interest rates, hidden charges and dubious recovery methods adopted by these platforms.

The apex bank made it clear that legitimate public lending activities can be undertaken by banks, non-banking financial companies (NBFCs) registered with RBI and other entities who are regulated by the state governments under statutory provisions, such as the money lending acts of the concerned states.

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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