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Jul, 2022     

Lending Market at The Cusp of Digital Disruption

With 80% of merchants going digital payment-enabled by 2026, the market will see more cash flow-based lending than traditional asset-based lending


The adoption of digital avenues has become the new norm thanks to internet penetration and smartphone usage – and the FinTech space is not immune to this change. In the most recent turn of events, it seems that the lending market is at the cusp of digital disruption. Today, it is one of the fastest growing sub-segments of Fintech. In this week’s newsletter, we bring to you all that you need to know about India’s lending market. Read on as Mrigank Gutgutia and his team share their insights:

1. India’s digital payments revolution is transforming lending to micro enterprises. Technology has created winning pathways for both digital lenders and merchants

 

For years, merchants have struggled to avail themselves of loans owing to lack of collateral, insufficient or poor credit scores, low incomes, monumental debts, or lack of consistent cash flow. However, with India’s payment landscape going digital, new-age digital lenders have come into the picture to offer respite. Digital lending offers instant loan disbursal: the payments backed lending model includes flexible repayment options, customizable loan tenure, preapproved credit and more.

2. With 80% of merchants going digital payment-enabled by 2026, the market will see more cash flow-based lending than traditional asset-based lending

 

Indian merchants are slowly saying ‘yes’ to digital payments as consumers continue to increase their digital footprint through mobile devices. Further, a sizable portion of India’s population owns smartphones, merchants included. All of this points to one fact: merchants in India are now more digitally enabled. As the frequency of digital payments rises, merchants with pre-approved credit will increase too. Digital is transforming how merchants finance their operations. Instead of waiting weeks for a bank loan decision, merchants can get funding as soon as the next business day. They can also manage their loan accounts in real-time and get immediate feedback on their creditworthiness. This gives merchants access to capital when they need it most instead of waiting for a bank to decide. Digital lenders, on the other hand, are adopting cutting-edge technological capabilities like AI, ML data analytics, and open application programming for insights into customer buying and spending patterns for building alternative credit models.

3. As a result, the market will see a 5x growth and payment based digital models will take a large share of India’s lending space! 

 

For lending companies, we can say “the time has arrived!”. Instant credit disbursal and sachet sized loans will attract seasonal merchants, and as merchants adopt payment backed lending, repeat customers with better credit scores will increase too. In the coming years, we will see a shift from traditional asset-based lending to cash flow-based lending. Payments-backed lending has several advantages like repayment schedule being dependent on actual cashflow instead of assets projected over a tenure of 1 year. It reduces credit risk, monitoring costs for the lender and with fintech interventions it also reduces origination costs and underwriting risks. Further, RBI’s initiative to create a Public Credit Registry to reduce information asymmetry among lenders will simplify reporting and make credit decisions faster with data available at a higher frequency.