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Digital Lending Landscape

India’s Digital Lending Landscape – Sep’22

The Indian Digital Lending landscape has undergone a dramatic shift over the past few years. The legacy systems and traditional practices that were prominent in this space are disappearing and getting replaced with digital processes that are powered by data and AI. This transformation has been further accelerated by COVID-19 and the social distancing norms put to counter it.

Now, with the RBI’s recent regulations, the lending space is further evolving and players are changing their business models to stay compliant. 

Keeping these changes in mind, we at The Digital Fifth have also revamped our Digital Lending landscape to include the new players and segments that have grown and flourished despite these tough times.

Please Note:

The ecosystem captured is non-exhaustive.

The additions made to the ecosystem is an attempt to capture the essence of India’s lending landscape.

A few of the criteria that have helped us choose the players are:

  • Size, Market share, and popularity of the company
  • Size of the segment
  • Uniqueness of the business model
  • Recent success in raising funds
  • Digital savviness of the company

The Digital Lending Ecosystem can be broadly classified into 5 segments.

  1. Banks & NBFCs (Regulated Lenders)

The bottom layer consists of financial institutions like Banks and NBFCs. They are the backbone of the entire ecosystem as they provide a major portion of the capital for lending. The players in this layer are traditionally large and highly regulated by the RBI. They form partnerships with fintech players, who provide them access to the untapped segments of the economy. Their key business expectations are:

  • Access to customers at low cost
  • Access to newer segment of customers
  • Utilization of Customer’s credit lines
  • Potential sharing of risks with Fintechs
  • End to end engagement by Fintechs – from onboarding to collections
  1. Data Providers

Another critical component of the ecosystem are the Data providers. These are the entities that collate external data through their platforms and provide them to the lenders in a structured way. This data helps the lender discern the validity of the customer and also assess his/her credit-worthiness. This layer got enriched with Account Aggregators and Technology Service Providers getting launched this year. This segment also consists of Credit Bureaus and Alternate credit platforms that have the capability to use non-traditional data and Artificial intelligence to underwrite a customer.

These players leverage sources of alternate data to enable financial providers to provide credit to the underbanked, unbanked and first-time customers.

  1. Core Platforms

It is extremely vital for any lender to have a robust and agile API Ready Loan Origination System (LOS) and Loan Management System (LMS). The LOS and LMS help to handle the origination and management of a loan by following principles that are designed to ensure the smooth running of the lending journey. These capabilities can be either built in-house, or can be acquired with a third party.

The LOS and LMS systems, when combined with the data received from the data providers, ensure that the entire lending process remains seamless. Apart from LOS/LMS, this segment also consists of players who enable collections.

Collections have normally been seen as the least priority in the technology stack for lenders while this could be critical to build strong lending portfolio. These platforms allow lenders to deploy reminder messages through appropriate channels to customers that are personalized and tailored to the needs of each customer. This ensures better customer experience and increases the recovery rate.

A new segment, Credit Card Management System (CCMS), has also been added to the ecosystem. These entities help financial institutions roll out credit card programs for their customers. They provide end-to-end card lifecycle management, such as customer approval, card issuing & logistics, customer specific targeting, engagement and more.

We have also seen enterprise platforms coming in the fray focused on co-lending, securitization, which are acting as a network for processing these transactions. These platforms reduce the need for point to point integrations and replace the same with a single layer.

  1. Lending Fintechs

Core part of the overall lending ecosystem consists of Lending Fintechs, who have used technology and ecosystem frameworks to build innovative delivery models, new products and pushing boundaries for lending. This core layer can be bifurcated into two broad segments in SME and Retail.

a. SME / MSME Lending Fintechs

The B2B segment consists of categories like lenders who specialize in the SME/MSME segment. With the government taking a special interest in boosting this segment, we see major traction happening in this space. The implementation of the Open Credit Enablement Network could also become a major game-changer for the players in this segment.

The segment also includes Invoice discounting companies that allow you to obtain a loan against your unpaid invoices and POS-based lending companies that provide a cash advance to the merchants against the future card payments of the company.

In the recent years, Revenue Based Lending and Corporate Cards have made decent progress and have also gained decent funding during 2022.

b. Retail Lending Fintechs 

The B2C segment or the consumer segment consists of categories like Buy-Now-Pay-Later which provides a point-of sale financing option to customers. This allows the customers to pay for their purchases in single or multiple interest free instalments planned for sub 3 months period. This category has seen a major boom across the world, but with the RBI’s new regulations banning the loading of prepaid instruments with credit lines, innovation here will slow down.

Of late, this category has seen a major boom across the world.

Other categories in this segment include e-commerce consumer finance players who provide check-out financing, Embedded Finance players, whose core capabilities lie in other verticals, and utilize their large customer base to cross-sell lending products. Retail credit card players, who provide credit-lines to customers that can be utilized whenever required and also specialized lenders who focus only on certain loan products like education loan, gold loan, salary loan.

Education loans segment has seen major funding activity, with players like Propelld and Zenda raising funds to help them expand operations across India and provide affordable loans to students.

ChitFund is a unique saving and loan product of a pre-determined value, duration, and number of members. The total value of the chit fund is the net of the contributions made by its members by the end of the term.

Automobile financing players like Revfin and Three Wheels United have been added as a separate category in the ecosystem as this space has seen a lot of activity and is expected to see rapid growth in the future

In P2P lending, the lending platform acts as an interface between 2 individuals. This is a C2C model which enables individuals to procure loans directly from other individuals through the platform. This model is appealing to investors as it provides an alternate investment opportunity and provides a higher return than a CD or a savings account.

With the lending ecosystem adding new players every day, the borrowers are often confused about which lender to avail credit from. This is where a loan marketplace comes in. These platforms allow borrowers to compare the loan products offered by different vendors and choose the one that best suits their needs. These marketplaces also play a role in ensuring that the borrower receives a competitive interest rate for his loans.

5. Investors

The ecosystem is well supported by investors, who have ensured a continuous increase in scale of lending fintechs.

  1. Investors

The ecosystem is well supported by investors, who have ensured a continuous increase in scale of lending fintechs.

Digital lending ecosystem in India is getting bigger and better with time. It is the highest funded segment in Indian Fintech, followed by Payments and Open Banking.

This ecosystem will facilitate financial inclusion and propel the progress of all Indians.

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