Why FinTech will disrupt the lending sector in India?
Why FinTech will disrupt the lending sector in India?
The lending
sector in India has always had two distinct segments in operation. The standard
lending segment is run by banks that offer loans for your business or for your
personal needs like buying a house, a car etc. Then there is the alternative
lending sector which has historically relied on securing credit from members in
the community or self-professed lenders in the area that lend with almost
credit-checks but who charge much more than the bank rates. A strong third
player is also emerging (which actually belongs to the alternative lending
sector) in the form of Non-Banking Financial Companies. These firms are sort of
taking the best from both worlds and giving banks a run for their money (pun
intended). But even then, the lending sector in India still needs to address a
credit supply gap worth USD 200 billion1!
The FinTech
industry in India is growing at a steady pace that even beats the numbers
worldwide. The expected (ROI) on FinTech investments in India is 29% against
Asia’s 25%1. This growth in FinTech has had an impact on the lending
sector for the better. The financial pundits at PrestLoans (www.prestloans.com) have analyzed why
FinTech will have the biggest impact on lending and here are their reasons.
Reasons for
FinTech’s impact on lending
1)
There is strong government
support for FinTech- The Indian government has been
very clear on its stand on digitization and digital currency. It is little
surprise then the government has launched the ‘Startup India Program’ to
nurture and help young start-ups to grow (there were 158 start-ups in the
alternative lending space in 2016 alone2). Start-ups can quickly
build the technology that can then be used by traditional financial
institutions who themselves may not have the agility to build new technological
capabilities. The government has also announced the ‘Jan Dhan Yojana’ which
aims at reducing the population that is unbanked or underbanked. The National
Payments Council of India (NPCI) has also introduced a number of moves to
facilitate payments (like the RuPay cards, UPI, BHIM) which sets a good example
for the other sectors to adopt technology.
2)
The regulations coming in
can be best addressed by FinTech- The introduction
of Aadhar and the ubiquitous linking of it to almost every asset one has,
brings greater scrutiny into the financial sector. The growing regulations will
stifle out unregulated players who operated as per their own will. But this
push for regularization will only help the lending sector, if it adopts FinTech
to automate identity verification, KYC
and AML checks and fetch credit scores to disburse a loan, thoughtfully. The
days of ‘loan sharks’ are coming to a slow end.
3)
Emergence of technology as
the all-pervasive medium- It is not just the
government but technology in general that has become all pervasive. The
functioning of ANY sector today, and not just lending have to take note of the
growing digital penetration in India. The number of smartphone users in India
is projected to grow to 500 million users by 2020 compared to 150 million in
2016. This makes it obvious that any new service, lending or otherwise needs to
be technologically enabled. The establishment of ‘India Stack’- the largest open
API in the world that is aimed at creating presence-less, paperless, cashless
service delivery ran a pilot by attempting to solve the problems of loan
disbursement. This is testimony to the fact that India’s financial sector is truly
going digital, with capabilities like the India Stack which weren’t there
before.
4)
Banking technology is gearing
for its next revolution- The primary lending sector
could also see quick adoption of FinTech if current banking technology is
anything to go by. Ever since banks underwent their digital transformation in
1991 due to legislations pushing for MICR, e-Transfer etc. the industry has been technologically
stagnant but the current players have started taking technology seriously,
which is why we have HDFC Bank and the Fintech startup, ‘Tone Tag’
partnering to provide phone-based proximity services and Yes Bank teamed
up with
Ultracash Technologies to design sound-based proximity payments. These
trends by the big players will push everyone (including lenders) in the sector
to take up FinTech more seriously than ever.
5)
Growing interest by
investors- Goldman Sachs had announced potential
investments of up to USD 10 million in the FinTech start-up scene back in 2016.
Barclays and Citi and much closer to home, SBI, ICICI Bank, RBL, Axis and many
other large banks have set up innovation hubs or accelerator programs to
attract FinTech startups. Other VC firms like Sequoia, SAIF, Matrix Partners,
IDG have also expressed interest in the FinTech sector and the investments
continue to grow which will sustain the FinTech sector to revolutionize
lending.
Conclusion
The lending sector in India will see impressive growth in the times
to come and FinTech will play a big part in that growth. New age NBFCs like
PrestLoans (www.prestloans.com) are
already using FinTech to execute better credit scoring, faster approval
processes to build a more memorable customer experience. Their efforts in
adopting FinTech will be key in propelling the lending sector in India to
heights, never seen before.
Sources:
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