Fintech lending set to surpass traditional by 2030 for mid-small income

India's fintech industry has been growing over the past few years on the back of the emergence of several fintech start-ups

The credit needs of small to mid-income segments are unique and diverse, which can be sustainably fulfilled only through fintech lending, a leading market participant has said.

The assertion comes days after the Centre for Advanced Financial Research and Learning (CAFRAL) published a report that said fintech lending was poised to exceed traditional lending by 2030.

This projection was not only a testament to the growing influence of technology in the financial sector but also an indication of the evolving preferences of borrowers and lenders.

CAFRAL, a not-for-profit organisation, was set up in 2011 as an independent body by the Reserve Bank of India (RBI) to promote research and learning in banking and finance.

“Of the 14,000 newly founded start-ups between 2016 and 2021, close to half belonged to the fintech industry. Fintech lending is projected to exceed traditional bank lending by 2030,” the CAFRAL report said.

As the sector grows, customer needs and preferences for digital financial services, paired with better accessibility, would be the major factors for fintechs to rise above traditional bank lending.

“The credit needs of our people, especially small-to-mid income segments, are unique, diverse, and vast. We can sustainably fulfill them only through fintech lending. As a country, we have invested in the fintech ecosystem, which gives us a solid framework to transform traditional lending towards fintech,” said Sugandh Saxena, the chief executive officer (CEO) of the Fintech Association for Consumer Empowerment (FACE). 

Additionally, fintech players believe their collaboration with banks will have a compounding effect to drive the change. 

“It is the collaboration between fintechs and banks as a consumer, manager, and supplier relationship that will fuel the compounding effect. I believe the UPI moment is close for fintech lending,” said Akshay Mehrotra, co-founder and CEO at Fibe, a digital lending company. 

Mehrotra suggests that digital financial products are suited for customers, and better governance of fintechs will enable fintech lending to emerge as a prominent successor to traditional players in the future.  

“Products that are better for consumers, and better governed fintechs will emerge as larger successors in the coming days. This includes better credit practices, reduced costs for consumers, and democratising credit to the masses. India has a strong banking regulator with consumer interest at heart. We are the largest digital economy and possess the capability of delivering the largest outcomes,” he explained. 

The CAFRAL report highlighted concerns such as usurious interest rates, unethical recovery practices, and data privacy issues, among others, in the backdrop of the rapid growth in digital lending.

“Borrowers are often not aware of the total costs of borrowing. Information on the charges and fees is not clearly communicated to them upfront. Another concern is that there are many fake/illegal apps in the marketplace. Users downloading a lending app cannot verify whether it is legal or not. (Moreover), there are many instances of third parties harassing borrowers regarding the recovery of loans and bothering consumers at odd hours, and by using physical and violent means,” the report said.
 

In such a scenario, it has become imperative for fintechs to invest in technology and systems that can improve digital lending processes in practices such as underwriting, cyber security, and data privacy. 

“Lending practices of unscrupulous authorised players, who are many, often colour the perception of fintech lending. Individually, fintech lenders are constantly investing in technology, systems, and processes to improve efficiencies, underwriting, cyber security, and data privacy to overcome the challenges. Fintech lenders working in regulated environments follow the regulatory framework, including digital lending guidelines and a code of conduct on pricing and recovery practices,” Saxena said. 

She explained that self-regulation is necessary to protect the interests of customers at a time when the industry is expanding in scale. 

“Collectively, fintech lenders are setting higher standards for customer protection like the FACE Code of Conduct and remitting FACE to monitor the market practices and take action if anyone breaks the rules. With so much industry diversity, innovation, scale, and speed, self-regulation is critical to customer protection,” she added. 

In September, the RBI governor Shaktikanta Das urged fintech firms to establish a self-regulatory organisation (SRO) at the Global Fintech Fest (GFF) 2023, in Mumbai.