Why India is experiencing a digital lending boom

Amid surging demand for online loans, Gaurav Hinduja, co-founder of Indian digital lender axio, says that his company is adding 10,000 customers a day and has amassed more than six million users to date.

“These are used to finance purchases from consumer products, tickets, to medical purposes,” he says, explaining that axio's customers take out instant loans of between $150 and $2,000 through its digital platform, and that 60 per cent of them are securing credit through a formal system for the first time.

The company is one of the dozens of start-ups that are tapping India's burgeoning digital lending market, which is expected to hit $1.3 trillion by 2030, growing more than four times in value from $270 billion currently, according to a report by Inc42, a technology information platform.

It projects that digital lending will account for 60 per cent of the country's financial technology market by 2030.

Factors including rising internet access in India, an expanding economy and the difficulties that many people face accessing finance through the mainstream banking system are major drivers behind the growth of digital loans, experts say.

“Start-ups in the industry are helping fulfil the huge unmet demand for financial services in the country that traditional banks are not able to meet,” says Neha Singh, co-founder of Tracxn, a market intelligence company.

“Start-ups in the space have made it very easy, cheap and convenient for users to take credit.”

“With a positive regulatory environment and increasing consumer interest, we expect the sector to keep performing well in the coming year,” she adds.

As the popularity of online loans grows, with digital trends only boosted by the Covid-19 pandemic, the country’s central bank, the Reserve Bank of India (RBI) has introduced new regulatory guidelines for digital lenders, which came into effect at the beginning of December.

These measures are aimed at protecting consumers and include only permitting loans to be disbursed and repaid through regulated entities such as banks and non-banking financial companies, having a mandatory cooling off period which allows borrowers to exit digital loans, and making it compulsory to have a customer's consent before increasing their credit limit.

“Recently, innovative methods of designing and delivery of credit products and their servicing through digital lending route have acquired prominence,” the RBI says.

However, “certain concerns have also emerged which, if not mitigated, may erode the confidence of members of the public in the digital lending ecosystem”, it adds.

The regulator explains that worrisome trends which emerged in the new segment included “unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices”.

Although the new rules left digital loans companies scrambling to comply, many industry experts expect the regulations to ultimately help to bolster the sector.

The regulations are likely to have an “overall positive impact with increased clarity for the borrower on the terms of the loan ... which should ensure higher growth as borrowers continue to build trust and come out of the informal lending sector”, says Sanjeev Chandak, co-founder and chief executive of Mumbai-based financial technology company ftcash.

Ftcash provides access to credit for micro and small retailers in India. The company has secured a non-banking financial company licence from the RBI to meet its regulatory requirements.

We have “implemented the required changes and are in compliance with the digital lending guidelines”, says Mr Chandak.

He and many others are hopeful that the guidelines will help to address some of the main problems that the sector has been facing with trust among customers.

“I firmly believe that the regulations will add to the robustness of the digital lending sector in the country,” says Rohit Gajbhiye, founder and chief executive of Financepeer, which offers loans to students to pay their education fees.

“The digital lending sector was in dire need of government intervention as malpractice and unethical business practices were on the rise,” he adds. “The regulations introduced by the RBI were the need of the hour, and I welcome this step.”

Remaining challenges for the sector include a lack of awareness about digital lending and data security, Mr Gajbhiye says.

But these issues are steadily being addressed as India's digital lending sector is helping to drive the country's consumer spending trends, and as its reach expands across a range of categories.

Easiloan is one of the country's first digital marketplaces for home loans.

It is “disrupting banks’ traditional processes to make them more efficient with faster turnaround time,” says Pramod Kathuria, founder and chief executive of Easiloan.

“This includes digital on-boarding of customers, a customer profile based matchmaking tool, digital collection of documents and instant credit analysis using algorithms.”

In its first year of operations, the company has facilitated more than 1,500 loans worth $100 million, Mr Kathuria says.

Something that is both a challenge and an opportunity for digital loans companies in India is that many of their users are accessing credit for the first time.

A lack of credit history often prevents many from securing loans from banks and other finance companies, prompting them to turn to informal lenders who offer loans at exorbitant interest rates.

But digital lenders are providing an alternative by using algorithms, artificial intelligence, and their own analysis to assess a customer's creditworthiness and gradually build up a credit history by using their platforms.

“We take a low-and-grow approach to providing credit to our customers, meaning we begin by lending small, and gradually, as per the customer's repayment history, the amount grows,” says Mr Hinduja of axio.

“The key challenge, as with any lending business, is managing risk,” he adds.

Companies are working hard to mitigate these risks, particularly because some of them experienced a rise in defaults as their customers were affected during the coronavirus pandemic, during which India imposed some of the world's strictest lockdowns.

“We have faced high defaults during the Covid-19 pandemic as have other lenders since our merchants could not conduct business due to the lockdowns. However, currently our defaults have gone down and are at the pre-Covid levels,” says Mr Chandak.

“We have built a technology platform that is able to assess the credit risk of the applicants accurately and hence we have not seen any unexpected [rise in] defaults in the current economic situation. Our platform is able to assess and also manage credit risk fairly well.”

Tracxn's figures show that India's alternative lending segment received a total funding of $2.21 billion in 113 rounds in 2022, down from $2.51 billion in 147 rounds in 2021, amid more challenging economic conditions for raising funds globally.

But the alternative lending segment was still the best performing sector in the Indian FinTech ecosystem, according to Tracxn, as investors consider its enormous potential.

“We're witnessing healthy growth rates,” says Piyush Jain, founder of Phocket, an artificial intelligence-based loans company, who says that the business expects to see five times growth over the next two years.

“Our target market consists of distressed and aspirational customers — most of them are salaried professionals,” he adds.

A typical customer is between the ages of 22 and 45, according to Mr Jain. The average loan is about 18,000 rupees ($218).

“Each applicant has their own set of reasons, such as a wedding, rent, medical, rental, education, shopping, personal, and others,” he says.

The company is about to cross 100,000 loan disbursements worth 2 billion rupees.

“India's digital lending sector is in its growing stage, being driven by the country's digitalisation,” says Mr Jain. “We're doing everything we can to make it simple to get quick cash.”