Factors Driving Growth in Digital Lending
Growth in a contemporary economy is predicated on a financial sector that is robust, resilient, and dynamic. Furthermore, the primary duty of the financial industry is to direct savings through the loan process toward profitable investment opportunities.
In the past, only banks, non-bank financial companies, and state-owned cooperative banks were allowed to lend money in India. But technological and innovative breakthroughs have caused a shake-up in the banking industry. There has been a surge in digital lending, with numerous fintech businesses vying for market share.
What is fueling the lending industry?
The explanation is that different sectors lend and borrow money, including individuals, businesses, and governments.
In general, the desire to save is influenced by the interest rates that are in effect right now, scenarios for anticipated inflation, and estimates of future income and expenses.
On the other hand, different needs highlight borrowing. To give an example, financial intermediaries take out loans from people or use the money to do additional refinancing. Companies might take out loans to cover their capital expenses. Through their sovereign wealth funds, governments can lend money to other nations so they can maintain reserves in more valuable currencies.
Below is a summary of the main elements propelling the expansion of the lending sector:
Profitability and Capitalization of Financial Institutions (FIs): Well-funded financial intermediaries are able to lend more money. This is particularly relevant for banks that the RBI has placed “reserve requirements” on. Their capacity to withstand payback losses affects their lending as well.
As non-performing loans (NPAs) increase, banks are compelled to increase provisions and restrict lending. If FIs believe that their loan performance may deteriorate soon, they might also restrict supply.
Competition in the Lending Market: The central bank has already started to liberalize the financial industry by granting licenses to neobanks, small finance banks, payment banks, and other entities. This increased rivalry between non-bank financial companies and traditional banks has changed the lending landscape.
These days, lenders want to expand their loan books by providing loans that are customized to each individual customer’s demands and circumstances.
Furthermore, riskier investments can be financed by lenders seeking greater yields, such as venture capital firms, angel investors, and PE firms, provided they are given favourable terms.
Macro factors: Global supply chain concerns, geopolitical unpredictability, and the global recession all have a negative tendency to impact credit supply. For example, the likelihood of a business disruption has grown due to worldwide shortages of essential commodities (like wheat and oil) and components (like semiconductor chips).
This affects the profitability and ability of the company to repay debt, so a more thorough investigation is required before approving a loan.
Investments in India’s Fintech Sector: Digital banking has displaced branch banking in the lending industry. The majority of venture capital funding has been directed toward the FinTech industry’s payments division. This has encouraged the formalization of financing for MSMEs and increased the number of loans available, particularly to the most distant areas of the nation.
Big Data Analytics, Artificial Intelligence (AI), and Machine Learning (ML): Lenders are using “data is the new oil” to better understand their customers’ demands.
Technological advancements such as blockchain, AI, ML, and big data have spurred lending activity. Lenders may now conduct speedy underwriting and enhance fraud detection thanks to data analytics, which guarantees quick loan disbursement.
Conclusion
The lending sector must be in good health in order to guarantee economic expansion. The lending industry has been changing as a result of new technology, particularly with the introduction of FinTech and mobile banking. On the strength of Bank 5.0, which will include decentralized finance, embedded banking, and robot advising services, this trend is anticipated to continue.
