Digitisation and partnerships to drive credit growth beyond 2024

Most large and mid-size banks today are strongly focussing on elevating the experience of their consumers as well as acquiring new ones, with help from fintechs.

India today stands tall as one of the most dynamic markets globally with a strong economy, a young population, and a gold-standard digital infrastructure. The last few years have been an exciting time for India’s financial services, which have become a case-study for the world to emulate.

I strongly believe that lending will help drive growth in the next five to seven years as a strong and world-class digital ecosystem will emerge in India. While the consumer credit market continues to be deeply under-penetrated with only ~5 percent of India’s population having a credit card, and a household debt-to-GDP ratio of under 15 percent (source: CEIC DATA), we have put the rails in place to usher in the next phase of growth. There may be some scepticism around the industry’s growth in the short-term due to changes in the regulatory environment, but the trends below should drive strong growth.

Rapid digitisation

While the pandemic gave a severe jolt to the world at large, it also helped the lending industry leapfrog at least three to five years, with respect to digital capabilities. Over-reliance on physical and paper-heavy processes led to a sudden drop in lending for several months in 2020, resulting in a realisation of the need to build digital infrastructure. Since then, almost all large banks and NBFCs have focussed on bringing in end-to-end digital processes, and today, the industry is much more robust and resilient, with greater ability to withstand external challenges. Today, several consumer segments can access unsecured loans and credit cards  smoothly and quickly, through completely online processes.

India’s burgeoning internet-savvy population with a preference for digital channels have resulted in strong growth for sectors like e-commerce, food delivery, and payments. Over the next few years, we can expect to see a similar trend in lending, with digital lending taking a larger bite of the lending pie.

According to a Google, Temasek and Bain report, digital lending comprises ~12 percent of the industry’s unsecured loan disbursals, which is expected to reach ~40 percent by FY2029-30, thus becoming an even more significant part of the country’s consumer credit market.

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Data ecosystem

Difficulty in accessing consumer data has been a key roadblock  that has held back the penetration of consumer credit in India. However, over the last decade, India has built  a world-class digital infrastructure through Aadhaar and IndiaStack, which have already led to exponential growth in sectors like digital payments.

Further, with initiatives like GST, account aggregators, and more mature credit bureaus coming into play, India’s new data ecosystem has laid the foundation for the long-term and inclusive growth of the lending industry.

The country’s data-rich ecosystem would be a key catalyst driving innovative and strong underwriting models at lower costs, helping banks and NBFCs make more informed decisions, thus mitigating risk and enhancing overall efficiency. This would not only streamline lending processes but also empower the industry to expand its services to traditionally under-served segments.

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Regulations

With the lending industry evolving rapidly, the RBI (Reserve Bank of India) has been proactive, helping the industry expand while protecting consumer interests. Its decision to bring in video-KYC before the pandemic, for instance, has gone a long way in helping lenders build secure and frictionless processes, leading to a faster turn-around time.

The regulator has stepped in to check for systematic risks time and again. While there may be some short-term challenges and moderation in growth for certain lenders or consumer segments, that’s part of evolution for any industry in the world, and the regulator’s moves have been for the overall long-term good for the industry.

Deep and innovative partnerships

When fintechs first started emerging, many thought they would compete with large banks. However, what we’ve seen in the last few years is a more collaborative and complementary model, where both banks and fintechs are teaming up and combining their strengths to build innovative lending solutions that solve real consumer needs at scale. We have already seen the impact fintechs have had in sectors like payments and wealth management.

Most large and mid-size banks today are strongly focussing on elevating the experience of their consumers as well as acquiring new ones, with help from fintechs.

Over the next few years, we will continue to see deeper and more innovative bank–fintech partnerships, that would not just elevate the banking and lending experience, but also solve niche problems and add value.

Access to credit for under-served segments

The  severe under-penetration of credit is due to the lack of access to credit for large segments like new-to-credit, MSMEs, and sub-prime (in credit score). Before the credit bureaus came to India, these segments were catered to by big banks and NBFCs. However, post the 2008 recession and once lending institutions started facing losses because of growing NPAs (non-performing assets), they closed the doors on these more risky segments. For the next 10-12 years, banks and NBFCs largely catered only to prime consumers — those with a strong credit and employment history, and residing in the top 100 metros.

However, in the last five to seven years, the lending landscape in India has changed due to a large internet-savvy population, gold-standard digital infrastructure, more mature credit bureaus, and a robust data ecosystem. Today, the lending industry is strongly placed to truly innovate and cater to the needs of credit-starved segments. With the spread of digitisation, distribution of credit across smaller cities and towns would get easier, and at lower cost.

This trend should continue, and  with access to credit easing for these segments, we should see the credit gap shrinking consistently, leading to a more inclusive lending ecosystem.

Overall, India’s lending industry is perhaps in its most exciting phase, with a massive market opportunity ahead.