A look at the credit ecosystem and the trends that fuel its future

In 2020, India’s banking, financial services and lending landscape faced enormous challenges. The COVID-19 pandemic has created shockwaves in countries around the world, causing short-term recessions and long-term stunting.

According to a report by PricewaterhouseCopper on ‘Mapping the Indian Retail Lending Landscape’, in the first half of 2021, the pandemic exacerbated pre-existing systemic problems in the Indian banking sector – whether macroeconomic issues, major debt restructuring , asset quality depreciation, multiple financial fraud and money laundering cases.

Additionally, as of the first of 2021, the same report details that, overall, lenders had shown a preference for retail credit over business credit. The report also postulates that there has been a growth in secured personal loans relative to institutional credit after the pandemic.

Between March and October 2020, personal loan disbursements increased by 2.3%, while business loan disbursements decreased by 5.7%. Non-bank finance companies (NBFCs) and small lenders have been hit hard by the pandemic; more than established private and public sector banks.

Amidst all of these challenges, developments and obstacles, Indian banking and financial services have shown exemplary resilience. Credit trends have remained strong and there are strong signs of recovery and growth in the sector.

The credit landscape is constantly changing, innovating and growing. Changing customer preferences, ease of access to credit, increased demand for small loans, increased use of digital platforms, and inclusion of non-traditional lenders in this ecosystem indicate a continuously evolving space, even after a cataclysmic event such as like the pandemic.

Here, we take a look at the lending ecosystem – the exciting developments, disruptive innovations, and the trends that are pushing it forward.

State of the Industry – India’s Lending Ecosystem

According to the report ‘How India Lnds, FY 2021, by CRIF High Mark, an RBI approved credit bureau, the total size of the loan market in India (as of March 2021), stood at Rs 156.9 lakh crores – one hundred percent growth from fiscal year 2017 to fiscal year 2021.

In addition, over the past five years, the portfolio of personal loans has increased by 91%, microloans by 157% and commercial loans by 93%.

Micro, small and medium enterprises (MSMEs) credit demand in India is estimated to be quite high. However, the aggregate supply from formal sources is barely able to meet this demand. Overall there is a gap of 67.3 percent that banks and other established financial institutions are unable to serve.

This has opened the doors to new era digital lending platforms, the rise of NBFCs, new borrowers increasingly emerging from non-metropolitan cities, disruptive technologies and more. Here is a look at some of the most interesting developments in the lending industry.

Trends in the credit industry

The Indian lending industry is a dynamic space, with many trends and transformations taking place. In recent years, technology has emerged as a true game changer, encouraging fintechs to revolutionize lending in India, while simultaneously reframing the way traditional financial players approach the industry. Here are some of the major trends that are opening up new avenues for lending.

End-to-end scanning: the most significant trend observed in the sector is the increasing role of digitization. This change will help financial institutions and banks to streamline their operations such as collecting information, analyzing and organizing data. Automation will help employees and increase the efficiency of organizations. Automated platforms will offer fast and consistent credit approval, while digital loan platforms will speed up the loan management process.

The Rise of AI / ML in Business Lending Processes: Artificial intelligence (AI) and machine learning (ML) have already proven to be transformative forces for the fintech industry. Today, various companies are integrating them in different segments of the industry, the loan being one. Lenders are now looking at how AI / ML can automate complex processes, such as fraud investigation, automated loan offer generation, credit scoring, and more.

Blockchain to innovate in lending: Blockchain is revolutionary as it is, but now the technology is being considered for the improvement of many financial products and services. Currently, blockchain supports different lending processes, including speeding up lending processes, providing real-time transaction data, increasing borrowers’ control over their loans, managing loan repayments, etc.

The availability of small note loans: Banks are often reluctant to provide small loans, due to low profit margins and high underwriting costs. Millennials, who often have little or no credit history, are turning to fintech lending companies, with their “buy now, pay later” (BNPL) loans. Flexible in nature, these loans often carry zero interest rates and allow borrowers to repay in installments. According to a report by TransUnion CIBIL and Google on “Distributed Credit”, the future of lending is digital. The report states that NBFCs saw their outstanding balances increase by 30 times and represent 45% of all personal loans disbursed in 2020.

Self-service and omnichannel capabilities: These two elements place the customer at the center of the credit ecosystem. By opting for self-service – from requesting a loan to receiving funds – the entire process will require little or no manual intervention. Self-service will also reduce customer-lender interactions and remove the undue burden of redundant loan work by employees. Customers will also benefit from the availability of omnichannel communication. They can choose between website, apps, text messages or even social media platforms.

Switching to non-level I markets: With increasing smartphone penetration and increasing internet coverage, residents of Tier 2, 3 and 4 cities are showing their preference for digital lending channels. Users in remote locations can now easily access digital lending platforms and lending products.

The pandemic has strained the banking and financial services industry in many ways. However, it also paved the way for new organizations and new innovations to revolutionize this space. We’ll take a look at these developments in the 5th edition of the AWS Fintech Forum, where the brightest minds will discuss the biggest breakthroughs in the fintech industry. The event will take place on November 25 and 26. You can sign up here and join the conversation.