Relevance: GS-3:Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Inclusive growth and issues arising from it.

Key Phrases: Credit gap, Digital Lending, FinTech, predictive technology, predatory lending apps, tech-fins, ethical lending practices, consumer empowerment.

Why in News?

• In the last few years, India has emerged has one of the largest markets for credit products on account of growing credit gap, fuelled by Digital Lending. There is an urgent need for regulation in this space.

Key Points:

• While the MSME credit gap has been in focus for long, the Covid-19 pandemic has resulted in massive growth of the personal credit market.
  • According to a study by CRIF Highmark, small ticket personal loans (upto ₹50,000) have grown by over 86 per cent in value between March 2019 and March 2021.
  • A large part of this growth was fuelled by digital lenders.
• Digital lending is the new-age practise of applying for and giving out loan or credit to borrowers by financial services through the completely online or digital platform journey.
• According to reports, the digital lending market is projected to grow from USD 100 billion in 2019 to well over USD 350 billion in 2023.
  • Also, India had the highest FinTech adoption rate of 87 per cent as of 2020.
• Technology and consumer-focused products have been driving the growth of the digital lending in India with alternate credit scoring, underwriting and leveraging AI/ML and predictive tech have disentangled the otherwise complex process of handing out personal loans.
  • Other factors include growing smartphone usage, internet penetration, credit range flexibility, and the convenience and efficiency that digital brings.
  • This has helped millions achieve their financial goals, especially during loss of incomes and need for emergency funds.

• There is a greater push for innovation in the fintech space with companies building credit instruments catering to differing consumer needs.
  • In fact, this focus on innovation has made traditional lenders partner with fintechs to reach more borrowers.

Concerns:

• There has also been a growth of predatory lending apps which entice consumers with promises of easy loans with disguised high interest rates and use of unethical means.
  • Till February 2021, RBI has received 1,019 complaints related to unregulated and unregistered online lending apps indicating a trust deficit among consumers.
• The rise in demand for digital credit coupled with the proliferation of predatory lending apps and the entry of big-tech (now popularly known as tech-fins) players like Amazon and Google into the market has put the industry at a crossroads making both borrowers and regulators cautious.

What more needs to be done?

While the regulators are doing their part, lenders and fintech players should work with the regulators to build a responsible digital lending ecosystem to further the financial inclusion mission of the government.

Under these circumstances, following steps must be taken to build a sustainable and responsible digital lending ecosystem:

• Building and promoting ethical lending practices:
  • Industry association Fintech Association for Consumer Empowerment (FACE) has released a code of conduct for digital lender to build consumer confidence by bringing them into the fold of ethical digital lending.
  • In fact, more stakeholders need to be brought into the purview of ethical lending to further strengthen their trust in the system and drive away predatory lenders from the market.
• From consumer experience to consumer empowerment
  • In today’s world of “experience-economy”, consumer experience is the focal point for fintech companies in their innovation journey.
  • However, to build a sustainable lending ecosystem, one must go beyond consumer experience to consumer empowerment.
  • To make this shift, fintech companies should not only think of how to make credit easily accessible through technology, but also think about being transparent about the lending process while spreading awareness on how to stay safe while borrowing money online.
  • Empowering consumers goes a long way in increasing the scope of digital lending.
• Synergies between regulators and industry players
  • The entry of tech-fin players into the consumer lending space has perturbed the regulators who are concerned about its implications on Indian consumer financial data.
  • However, restricting the entry of big tech players will counter productive as big tech companies, with their extensive data and robust technology, can help transform the consumer lending space and bring more people into the credit fold.
  • Industry players must work together with the regulators so that concerns related to consumer data can be addressed and the power of big-tech companies can be leveraged.

Conclusion:

• India is well poised to be a leader in the consumer lending space.
• However, the only thing hindering the expected growth of the sector is the trust deficit among consumers. By building a responsible and sustainable lending ecosystem, this trust deficit could be reduced, leading to a truly Digital India.

Source: The Hindu BL

Mains Question:

Q. Digital lending has emerged as an effective alternative to traditional lending for people who are new to credit or are underserved by the financial system. Discuss. In this light analyse the need to regulate this space.