Financial lending has evolved through the ages - from the old-fashioned barter systems to a more official system during the Mughal and British colonial rule. The opening up of the economy and nationalisation of banks in the 90s paved the way for financial democracy with the entry of private banks and non-banking financial institutes (NBFCs).
But even till a few years ago, getting a loan meant standing in long queues, doing endless paperwork, and still facing rejection in some cases. However, as of today, technology is at the centre of the lending revolution, with digital lending platforms leading the way and addressing the challenges of traditional lending.
The growing digital adoption on the back of affordable smartphones and good internet connections has transformed the lending industry in India. It is predicted that digital lending will be 5% of all retail loans by FY28 at a compounded annual growth rate (CAGR) of 40%.
Let’s take a closer look at the role of technology in revolutionising the lending industry:
Quick Application Process
Any individual can now apply for a loan with a few simple steps through their smartphone. The easy-to-fill forms require minimal information instead of a pile of documents like bank statements, tax returns, identification documents, etc., to apply for a loan. However, with digitalisation, the platforms can acquire the required information with limited information.
Additionally, automated verification improves accuracy by reducing the likelihood of human errors typically found in manual document reviews, ensuring fair and unbiased assessments of loan applications.
Further speeding up the application process is the e-KYC with Aadhaar and video KYC, which doesn’t require physically going to the bank. As a result, this technology-driven method enables people to secure financial support with greater ease and confidence.
Risk Mitigation
Credit risk management involves evaluating the probability of borrowers defaulting on their loans and applying strategies to minimise potential losses. Credit risk software plays a crucial role in helping financial institutions manage this risk effectively.
A key function of such technology is its ability to generate accurate credit scores, which are vital for lenders to assess the financial trustworthiness of loan applicants. Another important feature is the software’s decision-making capability, particularly through early warning systems designed to detect potential default risks ahead of time.
By analysing a borrower’s financial health, credit risk software can alert lenders to any shifts in their financial status that may indicate an increased risk of default. Additionally, credit risk software supports regulatory compliance by providing advanced tools for monitoring and managing adherence to legal requirements.
Peer-to-Peer Lending
Technological advancements have paved the way for the rise of P2P lending, creating direct connections that benefit both lenders and borrowers. Borrower portals, commonly used in P2P platforms, further enhance this experience by simplifying the loan application process and offering greater transparency.
Borrowers enjoy lower fees and interest rates, making credit more affordable. These portals allow individuals to easily submit loan requests and required documents online, speeding up the approval process and giving borrowers more transparency and control over their applications.
Swift Disbursal
Technology has sped up the disbursal of loans. Many fintech lenders offer instant approval decisions, allowing borrowers to access funds within hours — or even minutes — rather than waiting days or weeks. Traditional lenders often required borrowers to endure long approval processes that could stretch over several days or weeks.
Fintech has transformed this by utilising advanced algorithms and real-time data analytics to make quick lending decisions. As a result, loan approvals can occur within minutes, sometimes even seconds. This rapid decision-making process is a game-changer, especially for individuals with urgent financial needs, such as unexpected medical bills or car repairs. With fintech, borrowers no longer have to face the stress and uncertainty of prolonged waiting periods; they can quickly access the funds they require.
Flexible Repayment
Borrowers have the ability to choose from a range of repayment schedules and structures, enabling them to select terms that suit their cash flow and financial objectives. These flexible repayment options are tailored to accommodate borrowers' financial circumstances and challenges.
Those facing financial difficulties can opt for income-driven repayment plans, which adjust monthly payments according to income levels, ensuring that payments remain manageable even during times of economic uncertainty. Fintech lenders also frequently provide temporary relief options, such as deferment or forbearance, offering a safety net for borrowers dealing with unexpected financial setbacks — something traditional lenders often lack.
Conclusion
The integration of technology has significantly transformed the lending industry, enhancing the customer experience in various ways. From simple, user-friendly applications to chatbots offering assistance throughout the process, faster disbursements and streamlined repayments have reshaped the landscape.
Today, artificial intelligence (AI), machine learning (ML), and data analytics are driving this change, and their influence will only grow in the future. The advancements have also made the lending industry highly competitive, with traditional financial institutions competing with — or sometimes partnering with — fintech solutions.
Moving forward, digital lending firms are leveraging these technologies to improve efficiency and simplify the consumer lending process. Another emerging trend is natural language processing (NLP), with many smart lending systems expected to use NLP to understand and respond to customer queries, translating them into actionable insights for a more personalised borrowing experience.
By Bhuvan Rustagi COO & Co-founder of Per Annum