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04 May
  • Editorial Team
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The traditional approach to availing loans in India is fairly long and complex. However, the magic wand of digitalization has worked its spell in this sector as well, leading to the rise of a new trend we call "Digital Lending".

Digital lending, simply put, is the process of lending funds electronically. The paper trail is effectively replaced by a good Internet connection. A whole new type of industry called FinTech has emerged that has facilitated digital lending to everyday users. So why do we need digital lending, and how does it benefit the borrower or lender? Continue reading to find out.

Need for Digital Lending

  1. High Loan Origination Costs: An application for a new loan comes with a loan origination cost, which is described as processing fee for new loans. The justification for this fee is the amount of paperwork and background checks involved in approving the loan, and this fee could be as high as 1% of the loan amount.

  2. Long Turnaround Time: The aforementioned paperwork is not known for its speed, and things move at their comfortable pace. A typical loan disbursal takes around two weeks, while some specific loans might have to wait even longer.

  3. Location Flexibility (for applicant): For traditional loans, you and your lender need to be present at the same location. But for people with no branch in their area or who have to move around a lot, this is a needless restriction.

Factors Helping the Rise of Digital Lending

  1. Technology: Recent decades have proven that the most successful business models are the ones where the customers feel empowered. Today, we have software tools that can perform document verification, background checks and loan disbursal automatically, eliminating the need of approval by authorities and making the customer feel to be in charge of the entire process.

  2. Reducing Costs: The fewer people you involve, the more money you save. In case of digital lending, there is virtually nobody involved. Most of the manual work is replaced by software, and the process is completely paperless.

  3. Government support: In the Budget for FY 2018, Rs. 3,073/- crore was set aside for Digital India initiatives. A huge pillar of that plan was FinTech and P2P Lending, both of which will be playing crucial roles in transforming India into a digital economy. With government support Digital Lending is expected to gain greater significance.

  4. Increasing Focus on Customer Experience: With the rise of a digital economy lenders are also realising that they need customers more than the customers needs them, leading to greater focus on customer interests, and Digital Lending is big leap in that direction.

Benefits of Digital Lending

  1. Alternative Credit Models: Traditionally, getting a loan for the first time is always the hardest. A lack of historic credit data makes lenders skeptical, in Digital Lending, however, your digital life is your history. Social networking profiles like Facebook, LinkedIn, and other channels may serve as surrogates for credit history.

  2. Minimal Operational Requirements: Digital Lending transforms the traditional process as there is minimal papaerwork involved

  3. Quick Disbursal: The loan disbursal process has been upgraded with digital tools. As soon as the application processing is complete, the loan amount is transferred to the applicant’s bank account.

  4. Low-Interest Rates: Digital lending is better than just a paperless way to get money; it is also the more economic one, as interest rates are lower than traditional ones.

  5. Transparency: No more the old days when you had no idea what happened to your loan application and had to circle around the lender to know the status. Digital lending has ensured that those days are history. Now, you can check the current status of your loan application from the comfort of your home, on your smartphone.

Conclusion

Digital Lending is not just a new trend. It is the future of lending. The rise of MSMEs and their ever-growing demand for quick loans acting as a catalyst for the FinTech industry, and India is poised to become one of the largest digital economies in the future.

Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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