In recent years, the financial services sector in India has undergone a significant transformation, driven by advancements in technology and changing consumer expectations. One of the most notable developments has been the rise of digital lending. Grant Thornton Bharat and The Fintech Association for Consumer Empowerment (FACE) conducted the Risk Barometer survey 2024 to assess the risks associated with digital lending.

According to this survey digital lending is poised to become one of the most significant drivers of financial inclusion in India. The survey results provide deep insights on how the lenders and other stakeholders perceive the risks in the dynamic digital lending ecosystem. The perceived risks will shape the evolution of the digital lending segments amongst the Fintechs as they take steps to mitigate these risks, while striving to grow their business in the medium term. This year’s study highlights an important issue: the presence of unlawful Fintech lenders in the market. These lenders pose significant risks to the reputation and business of legitimate Fintech companies and their consumers due to threats like cybercrime, fraud, and money laundering.

This report, based on the survey, explores the landscape of digital lending in India, the impact of digital transformation in financial services, and the role of risk management strategies such as the First Loss Default Guarantee (FLDG). It is expected to provide a shared understanding of risks in the sector and converge efforts for collective action to address them. As the sector continues to evolve, innovate, and overcome various challenges, this study aims to provide valuable insights and support the development of a robust and trustworthy digital lending environment.

The rise of digital lending in India

Digital lending refers to the process of offering loans through digital platforms, leveraging technology to streamline the application, approval, and disbursement processes. The digital economy in India is rapidly transforming, driven by increased internet penetration and smartphone usage among the younger population. This shift has led to a remarkable adoption of Fintech lending by young borrowers in less than a decade of its emergence around 2015-16. Fintech companies are at the forefront of this revolution, disrupting the digital lending market and aiding financial inclusion. These platforms have democratised access to credit, reaching underserved and unbanked populations previously excluded from formal financial services.

Digital transformation in financial services

The digital transformation has been a game-changer for the industry. Fintech companiess are increasingly adopting digital technologies to enhance customer experience, improve operational efficiency, and reduce costs. This transformation is not just about adopting new technologies but also about rethinking business models and strategies to stay competitive in a rapidly evolving market. By leveraging digital footprints and alternate data, Fintech firms can make more informed lending decisions, reducing the barriers and limitations of reliance on conventional credit scores. Technological advancements, such as AI and ML, enhance credit risk assessment, fraud detection, and customer service, enabling lenders to offer personalised loan products and improve operational efficiency.

The top 10 risks

The top 10 risks according to the survey are listed below. Among the 23 risks identified, top 10 risks had an average rank of 5 and above, while the remaining 13 were ranked between 4 and 4.90.

Rank Top risks in August’24 Definition
1.
Unauthorised Fintech lenders
The unlawful Fintech lenders in the market harm customers with unethical practices, creating reputational and other risks for the Fintech lending industry.
2.
Cyber frauds & crime
These pose reputation risks and potential business losses to Fintech lender (and their consumers) due to cybercrime, fraud, and money laundering threats.
3.
Regulation
Excessive and frequently changing regulations for Fintech lenders create an uncertain business environment, slowing down innovation, affecting investment sentiment, and complicating compliance efforts.
4.
Compliance
The risk of non-compliance due to ambiguous and rapidly changing rules.
5.
Unfair conduct practices
The risk of aggressive marketing and collection practices, such as persistent harassment and deceptive tactics, that not only harm customers but also undermines trust in the Fintech lending sector.
6.
Costs
The risks are associated with rising costs of funding, operations, technology, compliance, and HR affecting margins and accessibility of affordable loans.
7.
Funding
The risk that Fintech lenders lack access to diversified sources of debt or equity funding at an affordable rate.
8.
Indebtedness
The inability of lenders to assess consumers credit repayment and absorption abilities lead to the customer getting over-indebted.
9.
Reputation
The risk that the Fintech lending sector suffers from poor reputation/lack of trust by regulators, government, customers and other stakeholders.
10.
Lack of data
The risk involved is the inability to assess consumer creditworthiness due to incorrect/inadequate data (unusable data trails, non-standard data, implementation of DPDP Act) and algorithmic biases leading to sub-optimal risk assessment, rejecting viable customers and exclusion of customers.

The top 10 risks

The digital lending market share reached 2% of the total amount disbursed by surveyed banks in December 2020. During 2022-23, five SCBs with 53% share in the personal loan market disbursed approximately 40% of loans digitally. The NBFCs surveyed also stated that 11.4% of loans were digitally distributed amidst overall lending activity in December 2020. Further, the credit extended through credit cards via e-commerce platforms, consisting of both EMI plans and lumpsum credit, increased by 32.4% YoY in 2023-24 to INR 11 lakh crore. 2 Indian Fintech and digital lending firms sanctioned 10.19 crore loans in FY 2023, increasing 35% YoY and the total loan value reached INR 1,46,517 crore, rising 49%. The average ticket size reached approximately INR 12,648 in FY 2023, compared to INR 11,094 in the previous year.

Conclusion

The survey results provide deep insights on how the lenders and other stakeholders perceive the risks in the dynamic digital lending ecosystem. The perceived risks will shape the evolution of the digital lending segments amongst the Fintechs in the medium term as they take steps to mitigate these risks, while striving to grow their business. The sector has, in recent times, faced instances of business disruptions due to regulatory action, either on specific entities or through revised regulatory guidelines as applicable for the sector. The survey results provide inside out view from Fintech lenders perspective which will also serve as an input for the regulators as they monitor the sector and align the sector participant’s perception with regulatory expectations. The alignment of regulatory expectations with sector participants perception will enable the orderly development of this relatively young ecosystem.