Are digital loans boon or bane for customers?

Digital lending apps are known for providing quick and easy loans without much hassle, but recently they’re in the news for all the wrong reasons, like excessive service charges, high interest, smearing defaulters, etc.

However, not all of these digital platforms are user-friendly and provide borrowers with opportunities to improve their credit score by making timely payments or worsen the score by casually taking small loans and ignoring the repayment schedule.

“As long as one can remember, loans have always been made in person, where lenders provide money to borrowers in exchange for interest. Over the years lenders were overtaken by banks and financial institutions and now banks are being overshadowed by NBFCs and FinTechs. As digitization matures in scope and intent, it is also advancing in leaps and bounds across the credit landscape. Considering the accelerated adoption of the FinTech revolution during the pandemic, digital lending has become the today and tomorrow of lending,” said Ajay Chaurasia, Vice President of Marketing, Products and Business at RupeeRedee.

“The pandemic required financial emergencies and limited access to banks and financial institutions that switched Indian customers to digital lenders in their hour of need. According to the Fintech Association for Consumer Empowerment (FACE), fintech lending companies doubled digital loans in the 2021-22 fiscal year, disbursing a total of Rs 2.66 crore worth Rs 18,000 crore. At the same time, RBI identified more than 600 illegal loan applications in 2021, more than half of the total loan applications in India. This clearly indicates that a multitude of factors are driving FinTech growth,” he added.

Chaurasia lists the benefits of fintech and the challenges it faces:

Instant loan disbursement

Digitizing the entire loan disbursement process, from loan application to credit check, has helped digital lenders reduce turnaround time. Additionally, collaboration across the financial ecosystem to leverage real-time KYC has significantly reduced time wasted on customer authentication. Digital lenders assess creditworthiness using technologies like artificial intelligence (AI), data analytics, etc., which helps them offer accurate loan amounts instantly. As a result, customers in dire need of financing can turn to digital lenders for their quick turnaround time, 100% digital process, and bag loans.

Greater accessibility and inclusion

Clients are often excluded from the formal realm of financial services due to lack of collateral, a decent credit score, or being new to credit. As a result, MSMEs, the rural population and low-income groups are victims of informal lenders and usurers. New-age fintech companies are closing this credit gap for underserved and unbanked populations by building a strong digital lending ecosystem. Digital lenders calculate creditworthiness by evaluating customers’ digital footprint, current financial situation, historical behavior, etc., not just credit score. In addition, the use of automation and artificial intelligence for document review, solvency, etc., removes bias from the application process.

Frictionless customer experience

Digital lending apps are designed to simplify the inaccessible and time-consuming loan process as it used to be. Under the conventional loan process, loan applicants would visit the bank multiple times and wait months to hear the bank’s credit decision. With online lending platforms, the route to get loans has become much shorter, much more comfortable and less stressful. Now customers can get loans directly into their bank accounts from the comfort of their homes within hours of applying. As a result, lending has become frictionless, accessible, and inclusive.

Key challenges affecting accessibility

While the speed and ease of access to digital lending are a boon to customers, they can also instigate financially damaging consumer behavior. As loans become accessible at the click of a few buttons, digital loans trigger reckless activities such as impulse lending and spending. Easy access to credit can lead clients to waste money or irresponsibly deplete the loan. Furthermore, digital access to credit also increases instances of indebtedness among consumers. The use of personal devices, a sense of anonymity and privacy reinforces secretive behavior that can be financially and emotionally damaging in the long run.

Aside from this, over the years the exponential growth of digital lenders has resulted in increasing incidents of illegal entities cheating innocent customers in need of small loans. These entities charge exorbitant interest rates, harass customers for late or non-payment of loans, and misuse customer data. These illegal entities are not registered as bank or non-bank financial entities and are far from regulation. Heavy job losses and financial emergencies during the pandemic drove a number of customers to illegal digital lenders, resulting in irreparable damage to credit scores and lives.

key takeaways

There is no denying that the benefits of digital loans far outweigh the nightmares. In the future, digital loans may become the new credit disbursement norm for underserved sectors of society, provided they are strictly regulated and consumers practice prudence. Backed by the government, regulated by the RBI and embraced by customers, digital lending can pave the way to financial inclusion even for the bottom of the pyramid.

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