The Rise of Digital Loans in India: Transforming Finance and Agriculture

Table of Contents

• What is Digital Lending?
• How did Digital Lending Boom in India?
• How Does Digital Lending Work?
• What is the Difference between Traditional Lending & Digital Lending?
• What are the Benefits of Digital Lending?
• What are the Challenges related to Digital Lending?
• How Digital Loans are Transforming the Indian Agricultural Sector?

What is Digital Lending?

Digital lending is a financial service that offers loans and credit services through digital channels and online platforms. It uses technologies like data analytics, websites, and mobile applications to simplify the lending process, from loan application to disbursal. Thus, there is no role of traditional intermediaries like physical financial institutions like banks. Even the repayment of a digital loan can be done online.

This loan process offers flexibility and convenience, which is why it is gaining popularity among the younger, technologically proficient generation. The lending process is quick as it eliminates time-consuming, traditional procedures like extensive paperwork. Also, the rise of the smartphone era has catapulted the growth of digital lending.

How did Digital Lending Boom in India?

In the recent decade, India has been at the forefront of digitalization. With huge developments in digital infrastructure, people have started to adopt digital methods across industries. It has also led to the modernization of the traditional lending system. The Indian fintech industry has embraced data and technology for financial services to make the lending system online and efficient.

The growth of digital lending in India can be attributed to several factors, including a large young population, a rise in digital penetration and per capita income. In 2022, India stood first in digital payments with 74 billion UPI transactions. There are more than 667 million smartphone users and 759 million active Internet users in India. Also, internet penetration was driven by the cheapest-ever data plans. All these factors led to the boom of digital lending in India.

Even though digital lending in India is in its nascent stage, it is expanding at a rapid speed. Between FY17 - FY20, the growth in digital disbursements was more than 12 times. The total disbursements in FY 22 was worth INR 21.6 lakh crores. By FY26, it is expected to cross INR 47.4 lakh crores. Also, digital disbursements were mainly done by private banks earlier. Now, fintech companies and NBFCs are increasing their use of digital channels. In FY22, NBFCs had a 32% share in the total loan disbursals through digital channels.

How Does Digital Lending Work?

The digital lending process is quick and straightforward, unlike traditional loans. Customers can easily apply for loans through online platforms like websites and mobile apps. Submission of required documents is also online. After applying for a loan, they can also check the status of their application on the platform.

The creditworthiness of the borrower is checked using data analytics and algorithms, as well as a range of factors like employment, income, and credit history. After loan application processing, KYC and risk check, approval is granted, and the loan is disbursed within a few hours or days. The majority of the steps in the lending process are automated for accuracy and time savings. The borrower can repay, foreclose or take another loan directly from the online platform.

What is the Difference between Traditional Lending & Digital Lending?

Check out the following table for a comparison between digital and traditional lending:

What are the Benefits of Digital Lending?

• Quick Loan Disbursal: The application process is streamlined, fast and convenient. Also, the approval and disbursal take less time, and borrowers get funds quickly. It is highly beneficial for those who need funds urgently. The decision-making time is shorter, and thus, customers are satisfied with the overall experience.
• Convenience & Comfort: Customers do not need to visit banks or other institutions personally. Also, there is no hassle of in-person conversations with loan officers or agents. Loans can be availed anytime online comfortably from homes. Also, millennials and Gen-Z prefer a smartphone for most tasks as it saves time and provides easy access to lending materials.
• Ease of Access: Digital lending is accessible to a wide range of users. Anyone with a smartphone can apply for funds online. Thus, it favours people who lack easy access to traditional lending services. Also, first-time borrowers without credit history find it easy to get a loan through digital means.
• Better Accuracy and Personalization: Digital lending makes use of data analytics and advanced algorithms for risk assessment. It is not only fast but also highly accurate. Manual paperwork and investigation are prone to human error and fraud. The use of modern tools offers precise calculation and assessment. Also, it reduces the chances of favouritism or discrimination across the lending process.
• Eco-friendly & Sustainable: There is less dependence on physical paperwork with digital lending. Even documents can be signed electronically with the help of e-signing. Thus, there is no paper wastage, making digital loans a sustainable and environmentally friendly approach. It also helps reduce the carbon footprint, which has become a major global issue.

What are the Challenges related to Digital Lending?

• Cybersecurity Risks: With the rise in digital transactions, the risk of cyber fraud has also increased. There is a major risk of data breach and financial fraud for customers. Thus, following all security guidelines outlined by the government and lenders is highly important. In addition, lenders need to place strict security measures for their digital platforms so that borrowers do not lose their money or personal information.
• Financial Literacy: A major population of India does not have adequate financial knowledge about digital lending. They are most prone to online fraud. Rural borrowers, including farmers, need to become somewhat familiar with financial concepts and digital solutions. Also, lenders are responsible for educating them about the processes and risks related to digital lending.
• Regulatory Compliance: As the digital lending sector is relatively new, it is evolving at a rapid pace. Thus, scammers may find a loophole in the already established legal framework for digital loans to swindle money from borrowers. The rules and regulations need to be updated regularly to be clear and comprehensive. Lenders also must comply with these codes and guidelines to ensure a safe lending environment.
• Tough Competition: Digital lending still faces tough competition from traditional lending institutions and lenders in mass markets. The rural population hesitates to get involved in digital loans for several reasons, such as lack of trust and education. Digital lenders need to spread awareness and build trust to grow in such a competitive landscape.

How Digital Loans are Transforming the Indian Agricultural Sector?

• Digitalization of the agriculture sector in India is transforming the lives of farmers. It includes using cutting-edge digital technologies to boost farm production and offering digital credit to help farmers.
• Digital loans are easy to disburse even to farmers belonging to remote locations where banking facilities are limited.
• Lenders can also easily verify farmers' creditworthiness to release funds quickly, helping them secure funds before planting season.
• Most farmers need loans to buy tractors for their farms at an attractive interest rate. Also, it offers different repayment options on EMIs for their convenience.
• Digital loans offer key benefits to farmers, including faster processing, less paperwork, and quicker funds.

Digitalization of the agriculture sector in India is happening at a fast speed. Along with the adoption of cutting-edge digital technologies to boost farm production, it includes providing digital credit to help farmers. Digital loans are easy to disburse even to farmers belonging to remote locations where banking facilities are limited. Lenders can also easily verify their creditworthiness to release funds quickly. It helps farmers get funds in time before the planting season.

Crop loans help meet all expenditures required to grow, raise and harvest crops. In addition, crop insurance protects farmers from financial losses because of crop failure or any other unpredictable situation. Fertilizers can be bought on loans to ensure a healthy and high crop output. Digital loans improve access to credit for farmers and help increase their income.

Mostly, farmers take out loans to buy tractors for their farms. A tractor is a highly important piece of farm machinery that increases productivity. A tractor loan allows farmers to buy a tractor at an attractive interest rate. Also, it offers different repayment options on EMIs for their convenience. Digital loans play a crucial role in the lives of farmers as they provide faster processing, less paperwork and quick funds. They empower farmers to boost India's agriculture sector.