Raghavendra Singh Royal Decodes the Rise and Impact of Digital Lending in the Modern Economy

Since digitization of every aspect of finance, one cannot escape how drastically banking has changed. Banks that once used to be full of customers now hardly have people at their doorstep. Digital lending is one such service that has revolutionized the financial landscape, offering unprecedented convenience, speed, and accessibility to borrowers and lenders alike. As traditional banking systems evolve to incorporate advanced technologies, digital lending stands out as a transformative force, reshaping how individuals and businesses access credit. Let’s delve deep into the topic with Raghavendra Singh Shekhawat, joint MD of the MRS group and Director of Kamod Commercial and Finance Private Limited.

Digital lending refers to the process of offering loans through online platforms or mobile applications, leveraging technology to streamline and automate various aspects of the lending process.

Digital lending offers numerous benefits, including speed and convenience by eliminating the need for physical bank visits, long queues, and extensive paperwork. Borrowers can apply for loans from home, and the approval process is much faster. It also enhances accessibility by catering to underserved populations, bridging the financial gap for individuals and small businesses.  “Digital lending has been a game-changer in improving financial access and inclusion, especially for underserved communities,” said Raghavendra Singh Shekhawat.

“By leveraging technology, digital lenders can reach borrowers who may have been previously excluded from traditional banking services, providing them with faster, more convenient, and more personalized credit solutions. This is empowering individuals and small businesses to meet their financial needs and unlock new opportunities for growth.”

Raghavendra added, “The transparency and efficiency of digital lending platforms are particularly beneficial, as they allow borrowers to clearly understand the loan terms and make informed decisions. This builds trust and encourages more people to participate in the formal credit ecosystem, ultimately driving greater financial inclusion across the country.”

Digital lending platforms provide clear, upfront information about loan terms, fees, and interest rates, helping borrowers make informed decisions and avoid hidden charges. Additionally, advanced algorithms analyze borrowers’ financial behavior and preferences, allowing lenders to offer personalized loan products tailored to their specific needs.

According to the Fintech Association for Consumer Empowerment (FACE), the number of loans disbursed grew by 35 percent, reaching over 100 million borrowings in FY24. The digital lending sector is advancing responsibly with a strong emphasis on customer focus, compliance, risk management, and sustainable business practices. In the March quarter, companies issued 26.9 million loans totaling ₹40,322 crore, with an average loan size of ₹13,418.

For FY24, the average loan size was ₹12,648, up from ₹11,094 in FY23. Companies raised ₹1,913 crore in equity and ₹16,259 crore in debt during the fiscal year, although equity funding decreased compared to FY23. Nine companies reported having 51 portfolios worth ₹9,118 crore under FLDG (first loss default guarantee) arrangements, with 94 percent of these portfolios covered at 4-5 percent. Additionally, 83 percent of the companies reported being profitable, an increase from 76 percent in FY22.

Raghavendra Singh Shekhawat states, “The data paints a clear picture as to how popular these digital loans have become and how people love the services they offer with ease and quickness. However, like with any other digital Fintech system, digital loans can lead to fraud. People need to be aware and educated for the same.”

Some digital lending apps have been accused of engaging in aggressive and unethical lending and collection practices, including harassing borrowers, charging exorbitant interest rates, and using coercive tactics to recover loans.

This has led to significant distress among vulnerable borrowers. Many digital lending apps also do not provide clear and upfront information about loan terms, fees, and interest rates, making it difficult for borrowers to make informed decisions and leading to hidden charges and unexpected costs. There are concerns about “fly-by-night” digital lending apps that are more focused on making short-term gains rather than building sustainable, ethical businesses, often disappearing after exploiting borrowers and leaving them in financial distress.

In an effort to curb the growing cyber fraud, the Reserve Bank of India (RBI) is considering establishing a Digital India Trust Agency (DIGITA) to stop the proliferation of illegal lending apps. This proposed agency will verify digital lending apps and maintain a public register of verified apps. Meanwhile, the RBI has shared a list of 442 unique digital lending apps with the IT Ministry to whitelist with Google. From September 2022 to August 2023, Google removed over 2,200 digital lending apps from its app store. The search giant has also updated its policy regarding loan apps on the Play Store, now allowing only those published by RBI-regulated entities (REs) or those working in partnership with REs.

Raghavendra Singh Shekhawat believes “The government’s efforts to promote responsible digital lending are commendable and will undoubtedly benefit the common man. However, it is crucial to equip people with knowledge to make informed decisions and protect themselves from predatory practices. While the government is doing its part in establishing regulations, developing infrastructure, and encouraging collaboration, we as a society also need to ensure that we are proactively spreading awareness about the potential issues surrounding digital lending apps”

Digital lending apps represent a significant advancement in financial technology, offering unparalleled convenience, accessibility, and personalized financial solutions. As the digital lending landscape continues to evolve, a balanced approach that fosters innovation while prioritizing consumer protection will be crucial for the sustainable growth of this sector.