Digital lending, can be best described as the use of online technology to advance and refurbish loans/ credits in order to provide quick and more competent assessments to end users/ consumers, as also provide them the fast monetary relief they desire. The process for the same is quite simple with an online loan application being offered by a bank or credit association on their website. It is always very inclusive, as an entirely mechanical manifesto consisting of an online loan application form, document list and subsequent encapsulate for the documents, electronic signatures, credit assessment, loan pricing, evaluation and management being made available. This makes everything very easily available to the end user to get into the process of procuring a loan.
Features of Digital lending:
The following are the salient features of Digital lending:
- Technology/ Internet Access based process: The internet access provides customers an electronic loan advancing podium with access from their computers or smartphones, or tablets etc to the various electronic manifestos on loan advancing. The whole process is a matter of convenience, as in this procedure you can just download a Loan Application, fill in the details and upload the necessary documents in a very short time, making it very time efficient and consumer friendly. A current day example of this kind of Loan Lending is the MoneyTap App. The entire processes is largely focussed on automated technologies, online lending podiums with very low operating costs as compared to banks or loan lending institutions, thereby making the App very easy to use.
- No or minimal paperwork: These automated podiums can easily assess a borrower’s solvency within minimal time based on the very information given by the desirous Applicant. These platforms give the entire structured model about how to repay the loan in line with the affluence of the Applicant. All this is done online and hence the use of paper is very minimal or negligible.
- Flexibility: These platforms give the flexibility to various borrowers to take top-up loans to meet certain sudden business expenses and thus offer a very flexible credit line for small amounts of money. This is a good solution than waiting for many days to get the loan Application processed after following the entire physical process of due diligence etc.
- Time saving: Some of these Loan advancing Apps can advance a loan within 4 minutes, as opposed to the process time of 7 to 10 working days in physical loans and hence are considered very time saving for both the Bank / Institutional lender and the Borrower.
Sudden surge of Digital lending:
With the COVID 19 pandemic suddenly surfacing in early 2020 and the subsequent lockdowns that were resorted to in order to curb the pandemic, lots of people suddenly got stranded, as their businesses may have halted due to the sudden shutting down of production. With limited access to banks in the lockdown, borrowers to meet various exigencies required monetary assistance. Therefore, suddenly these Digital lending Platforms came to their rescue to help them get some amounts of money to clear payments and other expenditures in the absence of production and profits of the industries, due to lockdown. Therefore, to combat this new normal the RBI also came out with a notification that provided a proper guideline for a Fair Practice Code and an Outsourcing instruction, so that this entire concept may adhere to norms.
The said notification released by the RBI is RBI/2019-20/258, DOR(NBFC)(PD)CC.No.112/03.10.001/2019-20 dated 24th June 2020 addressed to All Scheduled Commercial Banks (excluding RRBs) and All Non-Banking Financial Companies (including Housing Finance Companies). The important features/ extract of this notification are in the instructions provided as under in point no. 4 and 5 as reproduced herein under:
“4. It must be noted that outsourcing of any activity by banks/ NBFCs does not diminish their obligations, as the onus of compliance with regulatory instructions rests solely with them. Wherever banks and NBFCs engage digital lending platforms as their agents to source borrowers and/ or to recover dues, they must follow the following instructions:
a) Names of digital lending platforms engaged as agents shall be disclosed on the website of banks/ NBFCs.
b) Digital lending platforms engaged as agents shall be directed to disclose upfront to the customer, the name of the bank/ NBFC on whose behalf they are interacting with him.
c) Immediately after sanction but before execution of the loan agreement, the sanction letter shall be issued to the borrower on the letter head of the bank/ NBFC concerned.
d) A copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement shall be furnished to all borrowers at the time of sanction/ disbursement of loans.
e) Effective oversight and monitoring shall be ensured over the digital lending platforms engaged by the banks/ NBFCs.
f) Adequate efforts shall be made towards creation of awareness about the grievance redressal mechanism.
5. Any violation in this regard by banks and NBFCs (including NBFCs registered to operate on ‘digital-only’ or on digital and brick-mortar channels of delivery of credit) will be viewed seriously.”
Therefore, the RBI also understanding that this could be a solution to minimal use of paper and social distancing norms, stepped in to protect the borrowers and released these guidelines for the Lenders to follow. The Guidelines have also helped to standardise the process and make it more uniform than arbitrary.
Streamlining the Loan Process:
The physical process of loan advancement involves a lot of time and paperwork and is a very age-old way of dealing with loans thereby causing a lot of delay in advancement. On the other hand Mechanised or Digital Lending can easily streamline the incongruent systems, thereby making the data flow more dependable and stable during the loan commencing process. This way it boosts and accelerates the procedure without it being hassling to both lender and borrower. Further, the mechanised software can extract relevant monetary data of the borrower that is required for a credit risk assessment eg: tax returns, and other documents pertaining to the affluence or solvency of the borrower. The credit score of the borrower can be got almost immediately online and this can help data and ratio analysis of the borrower. The borrower’s financial status and capacity to repay the loan can be seen at a glance and the probability of default (PD) and loss given default (LGD) models, tools are available to immediately give results of the risk involved in the loan advancement.
Therefore, Financers who need more competent, proficient, and approachable methods want to shift to Digital lending in order to provide higher levels of service, as also look to implement technological solutions to long term difficulties in loan advancements. Thus, Digital lending with the automation and efficiency it offers is definitely a way of streamlining the very cumbersome physical process.
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