Why the government wants more from India's booming digital lending market

• Digital lenders should push for raising limits on small loans using technology.
• After digital payments, fintech players are rushing to offer small ticket consumer loans.
  
• Technology has made it possible for them to undertake different - often more efficient -modes of credit assessment.

India is a credit-starved country - at least for most ordinary Indians. But a slew of digital lenders promising instant or short-term loans is hoping to change that by filling the gap left by the onerous requirements of traditional banks.

However, the government wants even the relatively flexible digital lenders to step up their game. On Tuesday, Niti Aayog chief executive Amitabh Kant urged digital lenders to better use technology to raise the current caps on small-ticket loans.

According to Kant, digital lenders should push for raising these limits on small loans using efficient e-vetting systems like the one time password-based electronic know your customer (KYC) verification. Relying on biometric Aadhaar-authentication alone results in higher operating expenses for these lenders, he added.

“Currently, lending through OTP-based e-KYC is capped at ₹60,000 whereas the loan size through online digital mode, as per market data points, is approximately around ₹350,000,” Kant reportedly said at an event in Mumbai.

Earlier this year, the Indian government said it would bring in a more flexible regulatory environment for fintech players in order to increase financial inclusion. India has a vast unbanked population with an unmet demand for loans of roughly $200 billion from individuals and small to medium-sized enterprises, according to PWC.

The changing face of consumer lending

After digital payments, fintech players are rushing to offer small ticket consumer loans to serve the underserved market. Recently even search giant Google has also entered the fray, partnering with HDFC Bank Ltd., ICICI Bank Ltd., Kotak Mahindra Bank Ltd. and Federal Bank to provide instant, pre-approved loans.

Using data analytics and proprietary algorithms, digital lenders can provide instant loans ranging from ₹10,000 ($137) to ₹700,000 while saving consumers the hassle of long waiting times and extensive paperwork of traditional banks. Many of them have teamed up with NBFCs to facilitate these digital loans while some others are using the peer-to-peer lending models.

Technology has made it possible for them to undertake different modes of credit assessment - evaluating whether a borrower is credit-worthy - and lend where traditional banks would hesitate. For instance, P2P lenders use as many as 1,000 data points including data gleaned from social media, Aadhar, where a person lives, credit scores in order to minimise risk and often bypass physical paper-based vetting.

That enables many of these digital lenders to lend to people who are new to credit or who lack the requisite credit history. Lending times have also come down significantly from weeks to just hours.

Overall, digital lending represents a huge opportunity for both borrowers and lenders. It’s estimated that in India, out of 220 million credit-eligible people, just 70 million have actively taken out loans despite having eligible credit scores.