The lending business has been highly influenced by digitisation in India which can be attributed to amplified internet penetration and high customer expectations
NBFCs play a pivotal role in this emerging lending ecosystem and accounted for 55% of loans disbursed through different channels in 2020
However, there are potential risks associated with Digital Lending for NBFCs and it is crucial to adopt certain risk mitigation strategies
Technology has been the crux of the Indian finance industry, fueling a pronounced shift from offline to digital modes. Started with Internet banking, fintech graduated to online payments, and account opening, and has finally led to the advent of digital lending. The lending business has been highly influenced by digitisation in India which can be attributed to amplified internet penetration and high customer expectations.
A riveting evolution of digitisation across the Indian lending landscape with the growth of diversified fintech players and lending models has disbursed the number of digital loans by nearly 12 times by the end of 2020.
NBFCs play a pivotal role in this emerging lending ecosystem and accounted for 55% of loans disbursed through different channels in 2020. Led by fintech NBFCs, digital lending has services ranging from personal loans to business loans to vehicle loans, loans to individuals and MSMEs for everyone from the young generation, underserved segments to salaried customers.
Digital Lending has become a popular financial choice in recent years due to its convenience and accessibility for borrowers. However, there are potential risks associated with digital lending for NBFCs and it is crucial to adopt certain risk mitigation strategies which will ensure the stability and sustainability of their business.
Assessing Potential Risks
The primary risk associated with any kind of lending including digital lending is the possibility of non-payment on their loan repayments.
To mitigate this risk, digital lenders need to accurately assess the creditworthiness of the borrower by implementing advanced data analytics and credit assessment models to evaluate the borrower’s credit history and repayment capacity, which will enable digital lenders to make informed decisions and mitigate credit risk.
Since digital lending relies on internet software and online platforms, customers are also prone to cyber-attacks, technical glitches or system failures which disrupt operations causing loss of data, and leading to errors and delays.
Digital lending companies should invest in vigorous IT infrastructure, employee training, cyber security measures, and disaster recovery operations and ensure that security protocols are being practiced and revised to reduce operational malfunctions.
Failure to comply with regulations related to lending practices, anti-money laundering, customer data privacy and KYC norms can result in penalties, legal issues and reputation damage. As a result, digital lending channels need to stay updated with regulatory changes and create a robust compliance framework that helps lenders avoid legal troubles and establish credibility in the market.
Implementing Effective Risk Management Strategy
To manage digital lending risk, lenders not only need to adopt an intelligent but proactive risk management approach catered to establish a robust credit assessment model, invest in a strong IT framework, build a regulatory compliance network and last but not least diversify lending portfolios.
In addition to this, digital lenders can adopt advanced encryption protocols, firewalls, regular security audits and multi-factor authentication methods to protect against personal data breaches and prevent unauthorised access. Most importantly, these recommendations will help build trust in the digital lending network, thereby providing a progressive environment for the fast-paced world of digital lending.
The RBI has also constituted a working group on digital lending which has offered a strategy aimed at achieving a balance between measures addressing the challenges posed by financial lending and reaping the benefits offered by digital lending.
The group has provided recommendations around setting up a self-regulatory body to overlook lending channels, conducting coordination committees to address issues in the digital financing spending sphere, appointing TRAI as its member, and working towards development and compliance around baseline technology standards.
Thus, RBI’s balanced approach will aid financial lenders in reaping the benefits of ongoing digital innovation while minimising possible risks.
In a nutshell, digital lending offers numerous benefits for both borrowers and lenders but it comes with a certain set of obstacles that can be mitigated by employing a proactive risk management approach that is efficient and delivers promising results.
Thus, implementing risk mitigation methods will help foster a positive customer experience powering the rapid development of a concrete and comprehensive digital financial lending industry.