View from India: Digital lending models unlock value for borrowers

Digital transactions have given rise to some unlikely yet niche collaborations, including the case of Trade Receivables Discounting System (TReDS), an electronic platform for MSMEs or Micro, Small and Medium Enterprises. The platform facilitates the financing or discounting of trade receivables of MSMEs through multiple financiers. These receivables can be due from corporates and other buyers, including government departments and Public Sector Undertakings (PSUs). “TReDS aims to bring transparency into the operations. Quite appropriate as MSMEs contribute to 30 per cent of the GDP. Still, they tend to encounter difficulties in procuring loans,” said Kailashkumar Varodia, chief financial officer, Receivables Exchange of India Limited, at Resurgent India’s recent virtual session, Unlocking New Frontiers: Exploring Growth Opportunities in Digital Lending.

Being digital, TReDS enables MSMEs to choose their loan amount through an automated paperless process. Once the money is realised, it brings liquidity to the business; it is a multi-financier model. Now that’s as far as the process is concerned. For the MSMEs, it could be a means of price discovery through ease of use and access to cash. Still, it may be a challenge for MSMEs to get buyer acceptance on the platform. “The MSME market is a sizeable one, India is home to 17 million MSMEs. It means there’s potential and scope for growth,” added Varodia. TReDS is from the Reserve Bank of India, India's central banking institution which controls the monetary policy of the Indian rupee.

Tech tools are being integrated into digital lending. The on-lending and under-writing processes use AI-ML tools to collect data points. This has brought diversity into the digital lending. “Digital lending has also seen the proliferation of embedded finance. In this case, finance is offered for non-financial needs. An example could be that of credit cards that are co-branded with the Nikes and Pepsis of the world. Financial transactions are also happening through the smartphone,” said Nageen Kommu, chief executive officer at Digitap.

Digital lending is a vast area and those who are interested can explore into it. It’s understandable that start-ups have ventured into it, with their specialised digital lending services. On the flip side, digital lending platforms face the challenge of integrating with open banking on API or Application Programming Interface, a critical component of digital transformation. Digital lending requires regulations and standardisation, as APIs operate with multiple banks. Each bank operates in a specific way. Data security is an issue when it comes to digital transactions.

When we look at digital lending, it could probably do well to integrate the physical angle for the collection or sourcing part of operations. The collaboration between digital and physical can drive liquidity. “The regulatory perspective could take into account the dispersal of funds and where the collection should come from. It could be an operational challenge i.e. the arbitrariness on the score cards for detaining credit ability. As for rural, most people in rural India use apps. An example would be digital agri-lending that works there,” explained Arjun Muralidharan, founder, managing director and CEO of GrowXCD.

Digital lending has a wide spectrum of participants. Besides borrowers and lenders, there are agents who take the product to the market. Data providers offer credibility to the data. Last-mile delivery staff are also included. How all participants are seamlessly integrated for better digital inclusion needs to be figured out. “Product upgrade is important so that when it is borrowed, it provides the necessary service," highlighted Hari Subramanian, co-founder, Niti AI. "A case in point is agri-lending. It’s not just enough to lend money to the farmer. The farmer should be able to extract information about a product suitable for harvest.” A market needs to be created for it. To that effect, digital lenders need to be responsible for the particular segment that they are dealing with. Their digital model could unlock value for the borrower. This becomes a unified infrastructure platform for all the participants. The data ecosystem gives information for new product creation and under writing.