Digital Lending and EASE Reform Agenda

Context

Recently, PSU banks gave digital lending a push as part of the EASE reform agenda. 

• As part of EASE 4.0 reforms, state-owned banks were asked to focus on digital lending, co-lending with non-banking firms, agriculture financing, and technological resilience for 24x7 banking. 
  
  
  

What is Digital Lending?

• Digital Lending involves lending through web platforms or mobile apps, utilizing technology for authentication and credit evaluation.
• India still has the second-largest number of people who don't have a bank account.
• Over 190 million Indian adults don't have any kind of bank account thereby representing a huge opportunity. 
• The value of digital lending rose from USD 33 billion in FY15 to USD 150 billion in FY20 and is projected to reach USD 350 billion by FY23.

Benefits of Digital Lending

• Improved process transparency and shorter decision turnarounds reduce customer frustration.
• It minimizes instances of incomplete files that delay application review.
• It encourages better communication with the customer regarding what information they need to provide up-front.
• Financial institutions can also digitize the analytics and intelligence areas of the lending process.
• Digital lenders often forego these hard credit checks for short-term loans such as BNPL. 
• They rely on either alternative credit score data or little to no financial information, making loans more accessible to first-time borrowers.

Risks and Challenges

• Absence of regulatory framework for digital loans such as consumer loans, instant loans, etc.
• Absence of pre-emptive safeguarding mechanisms against fraudulent lending platforms
• Lack of monitoring mechanisms for LSPs and digital lending apps.
• Other issues include unethical business practices, mis-selling, cyber security and data privacy concerns.
• LSPs often resort to reckless lending practices by endowing credit beyond a borrower’s repayment capacity.