Digitisation In Lending: Analysing Social & Business Impact

India is establishing itself as a major presence in the world digital economy. By any number of key metrics, from internet connections to app downloads, both the volume and the growth of its digital economy now exceed those of most other countries. 

India’s internet user base is 743 million as of March 2020, while its smartphone base is expected to reach 820 million in the next two years from 700 million. Rural India witnessed a year-on-year growth of 35 per cent in 2018 as against 7 per cent in cities in terms of internet users. Smartphone penetration in rural India has also risen from 9 per cent in 2015 to 25 per cent in 2018.

Both the government and the private sector are moving rapidly to spread high-speed connectivity across the country and provide the hardware and services to put Indian consumers and businesses online. The availability of cheap devices and cheap data has, very importantly, helped drive the adoption of digital payments, with the roll-out of UPI. 

The combination of these factors has augmented the available lending data sets on rural markets such as credit bureaus and analytics. When viewed in conjunction with a rural population, that is more aware of “digital demand to digital fulfilment”, lenders have begun making product offers using digitised journeys that they have hitherto deployed in urban markets. 

What does this increased connectivity mean in lending terms? And how quickly and effectively will the country be able to harness digital lending technologies for the prosperity of underserved communities and businesses to access affordable credit? What are its social and business implications?

Distribution 

Product mix of rural retail assets has undergone a significant change over the past 36 months. A material portion of the new distribution has happened in traditional urban products such as personal loans and consumer durable loans with a fourfold growth in loans distributed when compared with 2016-17. The growth in distribution seems, to some degrees, to bear the causal effect of the entry of Jio and the success of the Rural Electrification Scheme.

Two wheeler, which was earlier the largest urban retail asset in rural distribution, continues to show a strong absolute growth. The rural market has shown an increase in demand by 11 per cent over the last four years. This also, in a limited degree, seems to be a causal effect of the PM Gram Sadak Yojana. 

Even in JLG, rural markets continue to show a higher growth rate than urban markets. Overall, the share of the rural in the pan-India market for lending to individuals continues to increase.

Responsible Portfolios 

As expected, a higher number of new-to-credit borrowers are now availing loans. The portfolio quality in rural markets seems to belie the hypothesis that these markets are riskier for these kinds of assets. Observed at comparable months of books, delinquencies seem to hold relative to observations on same product portfolios in urban markets. In certain portfolios like consumer loans, the portfolio at risk for 91-180 days past due for new rural borrowers is 63 basis points lower than urban borrowers.

It is worth noting that these delinquency metrics are computed on denominator values, which are very similar to urban markets.

Digitisation in Lending

The success of the digitisation story is partly attributable to the availability of newer business process management solutions such as Video KYC. While the idea of Video KYC was brewing before the onset of COVID-19, the opportunity to maximise its usage has finally come with the remote working norms. Faster onboarding meant faster origination and with a process as easy as Video KYC, the major problem of customer abandonment could also be reduced. It became a perfect match to accelerate SME lending through Video KYC which seemed like the most practical solution to break the onboarding bottleneck.

When viewed in conjunction with increased penetration of mobiles, cheap data, more electricity and advanced payment channels, rural consumers have shown a great affinity to an improved CX (self-fulfilled or assisted fulfilment). 

This new wave of BPM solutions has allowed lenders to invest in creating analytics assets (by combining their own information with external information) that are product specific, thereby sharpening their ability to segment rural consumers. The adoption of analytics is being seen in the “new” growth product lines as well as in traditional product lines such as KCC, Farmer Finance and JLG. 

Very importantly, implementation holds a key to digitally acquired responsible portfolio building. Lenders who choose best-in-class modules for a Customer Acquisition Engine and a Credit Underwriting Engine seem better poised than lenders who choose an end-to-end LOS. 

The author is National Sales Head of CRIF High Mark, a leading credit information company

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.