The good and bad sides of digital credit, in 5 charts

The trend is still in its infancy, but there are also concerns. Data privacy concerns and unethical or illegitimate lending transactions pose risks to financial stability given the pace at which digital lending is increasing, according to the report.

If well regulated, innovative and profitable models can help digital lending move beyond traditional lending modes in the future. Here’s more on the phenomenon:

1. A growing propensity

Digital lending refers to the online disbursement of loans where all processes, even loan approval and collection, take place remotely, usually through mobile apps. The change is part of the digital transformation driven by the pandemic. Loan apps made up just 4.9% of all apps installed in India in October 2020, but that figure jumped to 11% in October 2021, analytics company AppsFlyer said.

“While the economic implications of the pandemic may have played a role in demand, a borrower-friendly approach, reduced paperwork and high availability were also key to increased usage,” Aditya said. Maheshwari, Customer Success Manager at AppsFlyer India.

This was also highlighted by the RBI panel, which recorded a 12-fold jump in digitally disbursed credit ( ??1.4 trillion) by a sample of commercial banks and non-bank financial corporations (NBFCs) between 2017 and 2020. Low overheads and the use of technology help digital lenders operate effectively to meet the aggressive economic needs of post-covid, according to the report.

2. Strictly personal

Private banks and NBFCs dominate the digital lending space, with shares of 55% and 30% respectively in 2019-2020. The share of public sector banks increased from 0.3% to 13% between 2016-17 and 2019-20, according to RBI data.

Personal loans made up the lion’s share – just over half in value – of all digital loans made by banks. Next come loans to small and medium-sized businesses (16%). “Buy now, pay later” loans accounted for less than 1% share in value, but accounted for a 37% share in number of loans.

This is largely a symptom of a growing demand for low cost retail loans in general. NBFCs in particular now make more than half of their loans digitally, but in value, digital loans still account for an 11% share. This was shaped by the growing demand for loans for housing, vehicles and education during the pandemic. So much so that the trend has diverted attention from industrial lending, making retail the most important segment of the Indian credit market for the first time in 2021.

3. Impressive jump

As a significant portion of the loan portfolios for private lenders come from this rapidly growing retail segment, the conventional lending landscape is about to change dramatically. This in turn will increase the share of the digital loan itself in the overall credit.

Digital sourcing is already making big inroads in retail products. ICICI Bank, India’s second-largest private lender, processed 94% of its personal loans in volume digitally in April-September 2021, up from 62% in 2019-20. Kotak Mahindra Bank recorded 120% quarter-on-quarter growth in July-September in digitally sourced personal loans, and 105% sequential growth in digitally sourced home loans.

Not all banks provide comparable data every quarter, but the general trend is similar. Banks have responded well to this digitalization during the pandemic, with public sector banks and major private lenders offering their own apps for disbursing loans. However, the RBI report also noted the use of unsecured third-party applications for lending used by some private banks and NBFCs.

4. Legal entanglement

This creates the risk of dangerous transactions. The RBI panel found that over 50% of loan applications in the market may be illegal, and the trend could only increase as more applications arrive. About 2,562 complaints were filed against digital lending apps on the RBI’s Sachet portal between January 2020 and March 2021. That included 919 in a single month in December 2020, when the central bank urged consumers to report these apps. . Complaints typically relate to apps promoted by unregulated entities.

Recognizing this uneven and ever-changing lending ecosystem, the report proposed standards for the “orderly growth” of the industry. The panel recommended safeguard legislation and the creation of self-regulatory bodies capable of verifying and regulating the conduct of loan applications.

Anand Dama, banking analyst at Emkay Global, said the proposals seemed largely constructive for the digital lending space and matched expectations, but believed regulation could dampen the rapid growth rate of digital lending.

5. Reimbursement challenge

The rise in bad loans in the retail segment could be of great concern as the trend accelerates. Example: The programmed gross non-performing assets of commercial banks for two main sectors – agriculture and industry – decreased in 2020-2021, but increased for retail lending by 1.7% in September 2020 to 2, 1% in March 2021.

While lending technology can be a boon to the banking industry, aggressive growth at the expense of loan quality can lead to deterioration in asset quality in the future for banks below Tier 1, a said Vinod Nair, head of research at Geojit. Financial services.

This will increasingly highlight how banks can remain cautious while adopting new technologies. Responsible lending will remain a “distant goal” without customer awareness and vigilant enforcement, the RBI panel said.

All in all, digital lending is a positive technological breakthrough that is inevitable in the modern business environment and banking industry.