Digital Lending Decoded: How Banks Can Enable Paperless Loans

Digital Lending System in the Economic Landscape

The digital lending industry is emerging as a substantial contributor to India’s economic expansion, fueled by the surge in the digital economy and technological progress. Modern tech-savvy borrowers increasingly favor digital lending due to its convenience and adaptability through the popularity of micro-credit and BNPL (Buy Now Pay Later) services. The widespread adoption of smartphones, coupled with a diverse range of credit options, has propelled the exceptional growth of digital lending.

India’s digital lending landscape has rapidly transformed, benefiting from a thriving fintech sector and government support. A multitude of fintech startups and digital lending platforms have emerged, offering a comprehensive array of loan products tailored to diverse customer segments. The collaboration between traditional financial entities and fintech enterprises with innovative digital solutions has created a conducive environment for the flourishing of digital lending.

What is Digital Lending?

Digital lending refers to a contemporary loan acquisition process where individuals can request and obtain loans via online platforms, eliminating the need for in-person visits to brick-and-mortar banks or financial establishments. This streamlined method empowers borrowers to digitally navigate the entire loan application, approval, disbursement, and online repayment process.

It encompasses a remote and automated lending journey, predominantly leveraging cutting-edge digital technologies for tasks to facilitate customer onboarding, credit evaluation, loan sanctioning, fund release, recovery procedures, and accompanying customer support services.

The Emergence of Digital Lending 

The demand for digital lending has emerged due to the shortcomings of the traditional lending model, characterized by time-consuming procedures that impose significant stress on borrowers. This emphasized the requirement for a lending approach that provides borrowers with convenient access to various loans.

Factors such as high loan origination expenses and prolonged processing times prompted the introduction of a digitized lending framework. Conventional lending led to extended waiting periods, intricate documentation, and restricted loan choices. These challenges have been eradicated with the advent of this innovative lending approach.

The disbursement volume through digital platforms has surged significantly, witnessing a remarkable increase of over twelve times from 2017 to 2020. This growth trajectory has seen disbursements soar from ₹11,671 crore to ₹1,41,821 crore during this period.

With the advent of digital lending, the financial services sector is embracing a spectrum of emerging technologies. Distributed ledger technology or blockchain, IoT (Internet of Things), AI, and Big Data Analytics enhance efficiency and customer experiences. Cybersecurity, biometrics, and APIs ensure security and collaboration. Cloud Computing offers scalability, while Quantum Computing promises advanced computational power. Virtual Reality, Automation, and Robotics redefine engagement and streamline operations, collectively revolutionizing the financial landscape.

The Digital Lending Ecosystem in India

The digital lending landscape rapidly expands within India’s fintech domain. Over the past years, this sector has witnessed an exceptional surge, escalating from a modest 9 billion dollars in 2012 to 150 billion dollars in 2020. Industry experts project a sustained growth trajectory, with a staggering forecast of reaching 350 billion dollars by 2023.

A recent report from IIFL FinTech forecasts even more robust growth, envisioning the digital lending market soaring to an impressive USD 515 billion by 2030. As India witnesses the emergence of dynamic digital lending companies, the nation has experienced an impressive compound annual growth rate (CAGR) of 39.5% over a decade.

Digital Lending Taxonomy –

• Lending by regulated financial institutions viz., banks and NBFCS
  • • Consumer lending (B2C) →Unsecured lending

    →Secured lending, e.g., gold, vehicle & home loans.

    • Small business lending (B2B), e.g., Invoice discounting SME lending. PoS-based lending
    • Balance sheet lenders (banks/ NBFCs)
    • Market place lenders (NBFC- P2P)
    • Hybrid lenders (balance sheet lenders also participating in the marketplace)
• Lending by individuals/entities other than banks and NBFCS
  • • Consumer lending (B2C) →Unsecured lending

     →Secured lending, e.g., gold, vehicle, & home loans

    • Small business lending (B2B), e.g., invoice discounting, SME & PoS-based lending
    • Regd money lenders (not much evidence about their digital foray)
    • Non-bank non-financial companies (NBNC)
    • Proxy lenders (e.g., corporate cards, buy now pay later (BNPL))
    • Fringe lenders (illegal lending activities)software, enhancing convenience & collaboration, and reducing paperwork & negotiation cycles.

Digital lending in India has faced unethical practices like steep interest rates, undisclosed fees, aggressive marketing, unauthorized personal data access, and even borrower harassment. Some lenders impose excessively high-interest rates, making repayment difficult. Lack of transparency with hidden fees complicates loan comparisons. In extreme cases, lenders resort to harassment for loan recovery. Consequently, introducing RBI guidelines was imperative to regulate this market and address these issues.

Rules and Regulations of Digital Lending: RBI 

The recent surge of transformative innovations and the widespread adoption of digital lending apps on mobile and web platforms have revolutionized financial services’ architecture, provisioning, and consumption. This evolution has introduced new dynamics in synergy with digital counterparts like online payments and social media. However, there is a potential for certain entities to exploit this trend for their own purposes, with unintended consequences for the nascent ecosystem.

In light of these developments, the Reserve Bank established a Working Group (WG) on January 13, 2021, focused on comprehensively studying digital lending activities across regulated financial entities and unregulated players. The objective is to devise an appropriate regulatory framework that aligns with this evolving landscape.

The WG recommendations would act at three levels: regulated entities of the RBI, other regulated/ authorized entities, and unregulated entities, including third-party service providers functioning in the digital financial realm.

RBI’s September 2022 guidelines aim to regulate digital lending through Regulated Entities (REs) partnering with online lending platforms. Key guidelines include –

• Customer Protection and Conduct: 
  • • Loan servicing and repayment must be made directly in the borrower’s bank account.
    •  Clear disclosure of penal interest charges in the Key Fact Statement (KFS).
    • APR and loan details must be disclosed upfront in KFS.
    • Digitally signed documents sent to borrowers automatically.
• Disclosures and Transparency:
  • • Standardized KFS with loan details provided before contract execution.
    • Details of APR, recovery mechanism, grievance officer, and cooling-off period in KFS.
    • A list of DLAs, LSPs, and recovery agent details should be published on RE’s website.
    • Product information and details must be prominently displayed.
• Grievance Redressal:
  • • Nodal grievance officers for FinTech-related complaints.
    • Complaint lodging facility on website and DLA.
    • Complaints unresolved within 30 days can be escalated to RBI’s Ombudsman Scheme.
• Credit Assessment:
  • • Borrower’s economic profile is considered for creditworthiness.
    • No automatic credit limit increase without explicit consent.
• Data Privacy and Consent:
  • •  Data collection with borrower’s consent and audit trail.
    • Limited mobile access for onboarding/KYC purposes only.
    • Borrower’s consent for data use, sharing, and deletion is required.
• Data Storage and Privacy Policy:
  • • Limited personal data storage by DLAs/LSPs, responsibility on REs.
    • Comprehensive privacy policy compliant with laws and RBI guidelines.
    • Data stored within India, complying with statutory obligations.
• Technology and Cybersecurity:
  • • Compliance with digital lending technology standards and cybersecurity requirements.
    • Digital lending technology standards stipulated by RBI must be followed.
• Regulatory Framework:
  • • Reporting to Credit Information Companies (CICs) for all lending through DLAs
    • Reporting of structured digital lending products involving deferred payments to CICs.
    • First Loss Default Guarantee (FLDG) agreements to adhere to RBI’s directions.

Digital Lending vs. Physical Lending: Exploring Two Approaches to Borrowing

In the conventional Indian lending scenario, the application process for traditional loans is protracted, intricate, and time-consuming. Recognizing these limitations, digital lending emerged as a solution tailored to the borrower’s ease of access.

Digital lending has revolutionized borrowing by enabling quick, paperless transactions. It has freed borrowers and lenders from the cumbersome, time-consuming traditional loan process involving meticulous document gathering and organization.

The remarkable growth of digital lending can be attributed to its exceptional accessibility and unmatched convenience. Statistical data underscores a significant surge in the proportion of digital loans within the lending landscape, with borrowers increasingly favoring the swift and streamlined digital approach in lieu of the conventional and comparatively slower physical lending processes.

In a swift process comparison, digital lending offers seamless application submissions, real-time credit evaluations, and rapid fund disbursement. This starkly contrasts the lengthy, paper-heavy procedures of traditional physical lending.

Both digital and physical lending have their merits, catering to different preferences and needs. The choice depends on the borrower’s comfort level with technology, the desired speed of the lending process, and personal interaction preferences.

Key Catalysts for the Rise of Digital Lending

The remarkable expansion of digital lending can be attributed to a dual interplay of influences – those originating from the supply side and those stemming from the demand side.

From the supply perspective, the widespread prevalence of smartphones, internet access penetration, and data analytics advancements have collectively facilitated lenders with enhanced avenues to connect with an extensive spectrum of potential customers.

Conversely, on the demand side, the escalating requirement for immediate credit solutions, heightened customer satisfaction expectations, and the allure of tailored loan propositions have enticed borrowers  towards embracing digital lending practices.

Supply-Side Drivers –

• Technological Advancement – – The widespread adoption of smartphones and mobile internet access has opened new avenues for digital lending. With remote access, borrowers can apply for loans, track repayments, and manage their finances, enabling lenders to engage with a larger audience and offer loans seamlessly through mobile applications.
• Growing Tech-Savvy Population – With increasing digital literacy, more individuals are comfortable using online platforms for financial transactions, including borrowing. This growing tech-savvy population contributes to the growth of digital lending. 
• Financial Inclusion – Digital lending reaches a broader spectrum of borrowers, including those without credit history or limited access to traditional banking services in remote areas. By considering alternative data sources, such as digital footprint and social behavior, digital lenders can serve previously underserved populations.
• Data Analytics Advancements : The progress in data analytics and artificial intelligence has empowered lenders to assess creditworthiness using alternative data sources, making lending decisions quicker and more accurate.
• Cost Reduction : Online operations reduce the need for physical infrastructure and extensive paperwork, thereby cutting operational costs and enabling lenders to offer competitive interest rates and fees, making digital lending an attractive option.

Demand-Side Drivers –

• Instant Credit Access – Borrowers increasingly seek swift access to credit for various purposes, from emergencies to business opportunities. Digital lending platforms offer quick loan approvals and disbursals, meeting this demand for instant liquidity.
• Enhanced Customer Experience – Digital lending platforms offer a seamless user experience, enabling borrowers to conveniently apply for loans, track applications, upload documents, e-sign agreements, and manage repayments. Utilizing data analytics, these platforms customize loan offerings, catering to various needs, from personal loans to business financing.
• Simplified Documentation – Traditional lending often involves lengthy and complex documentation procedures, whereas digital lending platforms use advanced algorithms and data analytics to assess loan applications quickly, minimizing paperwork. This swift processing leads to faster loan approvals and disbursals, enhancing the appeal of digital lending.
• Credit Accessibility – Digital lending widens credit access for individuals with limited interaction with traditional banking systems, promoting financial inclusion.
• Transparent Terms – Many digital lending platforms provide clear and transparent terms, including interest rates, fees, and repayment schedules, giving borrowers a better understanding of their financial commitments.

The convergence of these supply and demand drivers has led to the exponential growth of digital lending, revolutionizing the way loans are accessed and processed while addressing the evolving needs of both lenders and borrowers in the modern financial landscape.

The Digital Lending Process

The digital lending process encompasses various technological components that ensure efficiency and security.

The entire digital lending process can be completed with a digital lending solution integrated with multiple tools. SignDeskn offers one unified platform where banks or any financial institutions can easily streamline digital lending documentation.

Digital KYC enables seamless identity verification, while e-stamping facilitates the generation of stamp duty certificates digitally. E-signatures eliminate the need for physical signatures, and NACH automates loan repayments, creating a hassle-free experience for borrowers.

• Digital KYC Software : Digital KYC software can verify borrower identity in real time on its smart platform using many advanced technologies like lightweight ID verification API, Face Detection software, ensuring compliance and security.
• Digital Stamping Tool : Digital stamping tool facilitates eStamping on loan agreements to legally validate documents by paying stamp duty online, adhering to regulatory compliance, and enhancing authenticity and credibility.
• eSignature Software : Smart eSignature software solution is an integral tool of the digital lending process. It enables borrowers to sign agreements digitally from anywhere, eliminating the need for physical signatures and enhancing convenience.
• eNACH Software: With Integrated eNACH eMandate software, the digital lending process is smoother and more secure. This compliant eNACH tool simplifies the authentication and validation of recurring payments, streamlining the repayment process of loans.

Digital Lending Workflow

• Application Submission: Borrowers initiate digital lending by submitting loan applications through the compliant digital lending platform.
• Identity Verification : Digital KYC software analyzes the provided data to verify the borrower’s identity, ensuring compliance and security.
• Document Authentication : Upon successful verification, important loan documents are digitally stamped, and stamp duty is paid online through the eStamping solution, providing loan agreements with legal authenticity.
• Digital Signature : Borrowers and lenders digitally sign loan agreements and other documents using eSignature software, enhancing convenience & collaboration and reducing paperwork & negotiation cycles.
• Repayment Authorization : Simultaneously, eNACH software streamlines the authorization process for recurring repayments, ensuring seamless repayment arrangements without missing a single obligation.

Through the orchestrated use of these AI & ML-powered software solutions, the digital lending process is optimized for speed, accuracy, and user-friendliness. Borrowers experience a streamlined journey, while lenders benefit from enhanced security and operational efficiency.

Risks of Digital Lending for Regulated Financial Institutions 

In the digital lending sector, convenience is paralleled by risks encompassing data security, operational integrity, and regulatory compliance, necessitating a proactive approach to ensure a secure lending environment.

• Credit Risk – The fundamental challenge in lending lies in the potential occurrence of borrowers failing to meet their loan obligations. To counteract this credit risk, NBFCs must meticulously gauge borrowers’ creditworthiness. Leveraging sophisticated data analytics and credit assessment models, NBFCs can thoroughly scrutinize factors such as repayment capability, credit history, and pertinent variables. This strategic approach empowers NBFCs to make well-informed lending choices, effectively mitigating credit risks.
• Operational Risk – Due to technological reliance, the digital lending sector faces potential technical vulnerabilities, cyber frauds, or system breakdowns that can critically interrupt operations, resulting in setbacks, inaccuracies, or data compromise. Financial institutions can combat operational inefficiency with smart IT infrastructure, robust cyber defenses, and contingency strategies for disaster recovery. Comprehensive training for staff in digital lending technology and rigorous adherence to cyber security protocols can avert data breaches.
• Regulatory Risk – Non-compliance with lending rules, data privacy, AML, and KYC norms can lead to penalties and reputation harm. NBFCs must stay updated with the latest regulations, uphold robust internal controls, and institute a compliance framework to navigate digital lending processes. This safeguards FIs against legal entanglements, preserves credibility, and upholds market standing.
• Market Risk – Economic shifts, interest rate fluctuations, industry dynamics, and geopolitical occurrences can sway borrower creditworthiness and loan demand. Banks, FIs, and NBFCs must monitor market trends, evaluate their effects on lending portfolios, and adopt diversification strategies to temper market vulnerabilities.

Mitigating these risks requires a comprehensive approach encompassing robust cybersecurity measures, adherence to regulations, diligent customer protection practices, and continuous monitoring of market trends and operational activities.

AML & KYC in De-Risking Digital Lending

Robust AML and KYC practices are crucial in de-risking digital lending by enhancing transparency, minimizing fraud, ensuring regulatory compliance, and bolstering customer trust. These practices verify borrowers’ identities, assess their financial activities and income sources, and flag suspicious transactions, contributing to a more secure and trustworthy digital lending environment.

Benefits of Digital Transformation in Lending

The digital transformation of the lending process brings numerous benefits. KYC compliance is expedited through digital processes, leading to quicker customer onboarding and loan approvals. E-stamping and e-signatures significantly reduce paperwork, saving time and resources for both lenders and borrowers. NACH automates repayments, ensuring timely collections and reducing the risk of loan defaults.

• Convenience and Accessibility – Digital lending platforms offer borrowers the convenience of applying for loans and accessing funds from the comfort of their homes or on the go. This accessibility has significantly expanded the reach of lending services, attracting a wider pool of potential borrowers.
• Data Security – Digital lending platforms utilize sophisticated data analytics and machine learning to evaluate borrower creditworthiness, enabling precise risk assessment and personalized lending. This enables more accurate risk assessment and personalized lending decisions, expanding credit access for underserved individuals. Advanced digital lending software safeguards data against cyber threats and unauthorized access in the borrowing process.
• Quick Loan Approval and Disbursement – Traditional lending process often involve lengthy approval procedures, whereas digital lending platforms use advanced algorithms and data analytics to assess loan applications quickly. This swift processing leads to faster loan approvals and disbursals, enhancing the appeal of digital lending.
• Speed and Efficiency – Automated digital lending processes expedite loan application, approval, and disbursement. This agility reduces waiting times for borrowers and enhances their overall experience.
• Expanded Reach and Financial Inclusion – Digital lending platforms transcend geographical barriers, enabling borrowers in remote or underserved areas to access credit opportunities they might not have had with traditional lenders.
• Real-Time Tracking – Borrowers can monitor their loan application status, repayment progress, and outstanding balances in real time through digital platforms, enhancing transparency and financial management.

Fortify your Digital Lending with Intelligent Process Automation 

SignDesk, a SaaS-based digital solution provider, offers digital KYC solutions along with integrated eSigning, eStamping, and contract management solutions. SignDesk’s AI & ML-powered digital lending software solution caters to the various requirements of the digital lending process.

Integrated smart solutions of the digital lending system can streamline the entire digital lending process using eKYC software for fast and secure, real-time verification, eSigning tool to sign documents electronically for quick loan approvals,eStamping solution to legalize any official documents, eNACH eMandate tool to facilitate recurring payments for loan repayments. To manage loan agreements and customer contracts, banks, FIs, and NBFCs can leverage our contract lifecycle management software for digital documentation of digital lending.

Merch towards digital transformation with the smart digital lending software solution.