Contents

1. Understanding Lending- An
Introduction

2. Digital Lending

3. Core of the Digital Lending

model
Module 5 4. Digital Lending- Industry
examples

Digital Lending
 Introduction

Hello, I am Abhijeet.

I am here to help you understand below mentioned topics today:

1. Lending
2. Traditional lending
3. Digital lending
4. Alternative Credit Decision & alternate data sources
5. Industry examples

Let’s Begin!
1
Understanding Lending-
An Introduction
1.1a Introduction to lending

In this section, we will understand about lending.

Let us understand it from our friends Abhijeet and

Sakshi
 1.1b Introduction to lending
I am good. You look
Hi Sakshi, How are Hi Abhijeet, I am fine.
worried. What
you? How about you?
happened?
Lenders will provide you the Thanks Abhijeet. Can
There are two types of
same. These are generally
lenders: Traditional Lenders
businesses or financial
& Digital Lenders
institutions
I am in need for Why don’t you Who is a lender?
money and not sure borrow money from What options do I
how to get the same a lender? have?
Lending is the temporary
I understand, but
you give me more transfer of money with the
who will give me this
information on expectation that it will be
money?
lenders repaid with an interest
Points to remember

Below mentioned points should be remembered

What is Lending?
• Lending is the temporary transfer of money with the expectation
that it will be repaid with an interest. Generally, interest is higher
if risk of not paying back the money is higher

Who is a Lender?
• Lenders are businesses or financial institutions that lend money,
with the expectation that it will be paid back with interest.

Let us continue with the conversation..

 1.2 Introduction to traditional lending
Let me start with
Sure. Please do.
traditional lenders
Second is Unsecured Loans where no
collateral is provided to the lender by the
borrower. Example: personal loan, student
loans, credit card etc.
Traditional lenders are bank (private, These institutions are regulated
On what basis do
public, co-operative), NBFC(large by RBI and must follow
they provide
and small) or MFI which provides designated rules in order to
loans?
loans to businesses or individuals provide any loans
There are 2 types of loans. First is Secured Loans They consider multiple factors
where the borrower keeps some asset as collateral What are the
before they lend to an individual or
(as a guarantee) with the lender in return of the types of loan
business like amount needed, cash
money. E.g.: Home loan, Vehicle loan they provide?
flows, & collateral provided
Points to remember

Below mentioned points should be remembered

Who are traditional Lenders?

• A bank (private, public, co-operative), NBFC - Non Banking Financial
Company (large and small) or MFI - Micro finance Institution, which
provides loans to businesses or individuals.

• Factors considered for lending by traditional lenders

• Amount of lending
• Cash flows of an individual
• Collateral provided
Collateral
Asset that works as a guarantee for the
There are 2 kinds of loans: lender, in case the borrower fails to repay

• Secured loans – collateral provided

• Unsecured loans – no collateral provided

Let us continue with the conversation..

 1.3 Gaps in traditional lending and need for digital lending

The traditional lending model failed to meet the evolving needs of borrowers and lenders and faced
several issues that were unaddressed. Following are few of those:

1
• Traditional lenders could not bridge the gap between credit demand and its
Supply vs demand gap supply

2
• Traditional lenders could only lend to the customers with sufficient and
Unable to finance credible credit history
customers with Insufficient
credit history • They require lot of documents which might not be available with all the
customers

3
Unable to finance
unqualified business owners
• Traditional lenders can only finance to qualified business owners having
reasonable credit history such as GST, tax file receipts, etc.
• Thus small businesses like shopkeepers, vegetable vendors are left out from
financing
 1.4 Introduction to Digital/ Alternate lending
Digital/ Alternative lending is providing loans The key players in the digital lending ecosystem are
through online platforms that use technology to
the borrowers: who could be individuals or small or medium businesses,
bring together borrowers who are underserved by
the lenders: who could be individuals or institutional investors, and
The partner bank: the bank who owns the platform
traditional lenders
The alternative lending platform acts as a facilitator that connects the 3 key players

Partner
Bank

These underserved borrowers range from

small and medium enterprises (SMEs) to
individuals Individuals/
Consumers

Lenders/Investors Alternative
lending
platform

Small and
medium
Businesses
 1.5 Difference between a Traditional & Digital lender
Digital lending is advantageous over traditional lending with lesser paperwork, lesser processing time and lesser
qualification requirements.

Traditional Lenders Digital Lenders

❖ Stricter requirements to qualify for a ❖ Minimal requirements to qualify for a

Qualification loan. For example, business owners loan. For example: Minimum credit
should have excellent credit score score or revenue requirement are
much lower for some digital lenders

❖ Requires significant amount of ❖ Requires less paperwork and

Paperwork paperwork and documentation documentation

❖ Takes anywhere from few ❖ Takes 2-3 days to provide

Funding days to a few weeks to the loan
Time provide the loan
 Points to remember

Below mentioned points should be remembered

What is digital/ alternative lending?

• Digital/ Alternative lending is providing loans through

online platforms that use technology to bring together
borrowers who are underserved by traditional lenders.

• These underserved borrowers range from small and

medium enterprises (SMEs) to individuals.

Next section will help you understand more about digital

lending.
2
Digital Lending
 2.1 Digital lending mechanisms
Alternative lending occurs using online platforms that leverage technology to match borrowers (who remained underserved by
traditional lending mechanisms) and lenders, who seek to lend at higher yields than traditional lending institutions.

Let’s discuss in detail these 3 That’s interesting.

Let me start with There are several types of types: Please explain these
digital lending Sure alternate lending models • P2P lending digital lending
mechanisms • Crowdfunding mechanisms
• Direct lending

Growth in digital lending segment in India

• More than 225 alternate lending companies had been founded in India as of 2017

• The segment is the second most funded in the Indian FinTech space and the fastest growing as well

India’s share of Alternate Lending funding has steadily increased vis a vis other Asian countries

Let me start with P2P lending. Peer-to-
peer (P2P) lending offers lower rates on
loans by connecting people-to-people
over the internet
2.2 P2P lending
Peer to peer lending, abbreviated as P2P lending is an emerging lending model that
matches individual lenders and borrowers through an online platform without any
intermediary such as a bank. The concept is gaining popularity as:

1. Loans are cheaper as the intermediary’s commission is avoided

2. Better matching of the lender-borrower pair as per their needs

Illustration of the P2P lending model

The risk assessment is made through a Lender 1

combination of the consumer’s
underlying creditworthiness, loan
amount and purpose

Lender 2
P2P platform firm

Borrower (SMEs,
Lender 3
individuals, corporates)

Crowdfunding entails raising external finance
from a large group of investors. The investors
can interact with the investees and
view their ideas on a crowdfunding platform
2.3a Crowdfunding
Crowdfunding is a type of P2P lending- but for organizations or start-ups. Small
companies can raise funds from the general public through crowdfunding. Each
individual lender extends a small loan, which gets compiled from similar loans from
several other lenders, effectively forming a large fund for the company.

There are 2 major types of crowdfunding:

1. Community Crowdfunding

Forms of Motivation of
Type Forms of return
contribution funder

There are 2 types of crowdfunding: Donation Intangible Intrinsic and

1. Community crowdfunding Donation
2. Financial return crowdfunding Crowdfunding benefits social motivation

Combination of
Rewards but also intrinsic and
Reward Donation pre-
intangible social motivation
Crowdfunding purchase
benefits and desire for
reward

Crowdfunding entails raising external finance
from a large group of investors. The investors
can interact with the investees and
view their ideas on a crowdfunding platform
2.3b Crowdfunding
While community crowdfunding is lending with a social benefit objective, financial
return crowdfunding is lending with the expectation of a return in the future.

2. Financial Return Crowdfunding

Forms of Motivation of
Type Forms of return
contribution funder

Repayment of Primarily
P2P
Loan loans with financially
Crowdfunding
interest motivated
There are 4 types of crowdfunding
These two are collectively known as
“financial return crowdfunding” Return on
investment in
time if the
business does Combination of
Equity well. Rewards intrinsic, social
Investment
Crowdfunding also sometimes and financial
offer intangible motivation
benefits, another
factor for many
investors

Have you understood
the two types of
digital lending?
2.4 Direct Lending (FinTech NBFCs)
Yes The next one is direct lending
Direct Lending services are offered through online
platforms, by NBFCs that have a lending license. The
digitization of processes allows for reduced costs and
gives NBFCs an edge over banks (they can extend
loans at cheaper interest rates than banks)

Main Segments they Compared to banks, NBFCs have benefitted by

Who are the target are individuals leveraging technology to rapidly scale their
Regulator is the Reserve like us and small
regulators? Bank of India (RBI) operations and to customize traditional processes
businesses and change minimal borrower qualifications in order
to penetrate underserved segments
 2.5 Industry trends in digital lending
Following are the 4 major trends in the digital lending space that have
the potential to define how this space develops in the near future

Clear distinction
between business
models for developed
and developing
economies 1 Emergence of digital loans
as a viable asset class
2

4
Evolving secondary
market for online loans

3
Traditional players are
reacting with agility
 2.5a Industry trends in digital lending

Clear distinction between business models for developed and

developing economies

• In developed economies such as the US and UK, the focus is largely on

consumer financing (refinancing existing loans, purchasing
goods/services, payment of credit card dues or education loans)

• On the other hand, in developing economies, the goal of most firms is

to reach under-/unbanked borrowers. These borrowers range from
small and medium enterprises (SMEs) who find it difficult to obtain bank
loans on amicable terms, to individuals who are subprime for
traditional lenders
 2.5b Industry trends in digital lending

Emergence as a viable asset class (a group of similar assets)

• Alternative lending has evolved as a viable and relatively less volatile

asset class for both retail and institutional investors

• Less complex investment decisions and higher rates make it an

attractive avenue for retail investors to place short-term funds

• Investment banks, hedge funds and insurance companies have

deployed massive amounts of funds by partnering with online lenders,
thus altering the structure of the industry
 2.5c Industry trends in digital lending

Traditional players are reacting with agility

• Banks across the world are closely watching this segment to ascertain
the sustainability of the business models, and many are starting to get
involved in some form or the other

• A few large banks have partnered with various online lenders and are
looking to join the bandwagon as investors

• A few others have taken strategic equity stakes in some of these firms,
while several others are looking to start their own online lending arms
 2.5d Industry trends in digital lending

Evolving secondary market for online loans

• Some online lenders are looking to bundle small-ticket size loans and
sell them to institutional lenders – this is called securitization*

• Securitization enables lenders to spread some of the risk and provides

Seci
additional sources of funding

• Some firms have formed internal hedge funds and affiliated entities to
act as investment advisors and participate in the securitization of loans

*Securitization is the process of bundling of small sized loans into marketable securities that are then sold to larger investors.
For example: A bank who has given out several small house loans in the form of mortgages can combine these into groups to form Mortgage
backed securities (MBS), which it can sell to investors such as insurance companies. The insurance company gains interest on these small loans
with the houses as collateral and the bank transfers the risk of default on the house loans to the insurance company.
Points to remember

Below mentioned points should be remembered

What is P2P lending?

• Peer-to-peer (P2P) lending offers lower rates on loans by
connecting people-to-people over the internet.

What is Crowdfunding?
• Crowdfunding entails raising external finance from a large
group of investors over a platform.

What is Direct Lending?

• Direct Lending includes platforms that have a lending license.
By leveraging technology to penetrate underserved segments,
NBFCs have capitalized on the inability of banks to rapidly scale
operations and customize rigid policies.
3
Core of the Digital Lending model
 3.1 Alternative credit decision model (ACD)
Thanks Abhijeet. You earlier said that
digital lenders require less
documents, then how do they make
the decision to loan or not?
Residential Data
Utility Payments Profile
Assets Ownership
Social Media
Other Payment/ Behavioural Data
Conventional Sources such as bureau reports
Data from various sources is collected
Good question Sakshi. They use Let me first tell you what are the traditional data sources used by
alternate data sources for credit banks for credit appraisal of a borrower. Some of these are:
decision. It is called Alternative 1. Bureau data such as: Credit accounts and applications,
Credit Decision address and ID verification and, fraud prevention and
detection
2. Banks generally use data from Indian credit information
companies such as CIBIL, Experian, Equifax and Highmark
Alternate data sources are being used recently by lenders to get
additional and more accurate info about borrowers. These
include, financial transaction data, social data, property data, etc.
Alternative Credit Decision (ACD) involves leveraging both
1. Unconventional consumer information
2. Conventional credit sources
to assess the creditworthiness of an individual.
Measure of creditworthiness
ACD Engine Alternative Credit
(Algorithms) Scores
Sent to ACD engine having Output is used for
algorithms for processing taking decision
 3.2 Advantages of ACD

Main advantages of Alternative credit • Leveraging alternate data sources expands the
decision model(ACD) are:
Expand Scope scope of customers who can be catered to

of customers • Applicants with less documents can now be

potential customers

• Increasing ability to accurately assess risk for a

Increased subprime borrower, while keeping
Accuracy of documentation requirements for applicants
Underwriting unchanged
Subprime borrower
Person considered to have relatively
high credit risk for a lender
 3.3a Alternate data sources used in ACD model

Demographic, Financial & Bureau Data

• This data is used to assess the creditworthiness of the

There are 2 types of
Please explain more data sources borrower: i.e. whether the borrower would be able to
about the data sources Conventional &
Unconventional repay the loan with a reasonably low default risk

• Data used includes, income data, past repayment

Conventional
Sources behavior (available from credit bureau organizations
such as CIBIL) and demographic data (age, location,
job profile)

• Limited effectiveness for ”thin-file” customers ('Thin-file'

customers are those who have very little repayment
behavior data)
 3.3b Alternate data sources used in ACD model

Social Data
Building more robust customer profiles based
There are 2 types of on social media behavior and usage
Please explain more data sources
about the data sources Conventional &
Unconventional Location Information
GPS information coupled with financial
transaction behavior

Transaction Behavior Unconventional

Utilizing customer search, product, purchase, data approaches
payment behavior, telecom, Utility bill and models
payments

App based data access

Smart phones provide a host of data to
leverage - texts, emails, GPS, social-media
posts, retail receipts, conversation lengths
 3.4 Data sources used in retail lending
Digital loan applications,
Alternate data can assist in developing • Reduce the cost of on-boarding (acquiring
robust underwriting* models to the customer), thus making small ticket loans
feasible
• Target new customer segments • Provide access to valuable information for
• Reduce cost of acquisition existing and future customers
*Underwriting is the process banks follow to determine if the risk level
associated with extending the loan to the borrower is within acceptable limits.
The cost of on-boarding new customers is
lower for digital lenders because:
• Lesser documentation is required,
• Lower operational cost due to
elimination of activities such as
document collections, verification,
salesperson visit, etc.
• Faster application processing time due
to digitization of back end processes
Points to remember

Below mentioned points should be remembered

What is ACD?

• Alternative Credit Decision (ACD) involves leveraging of

unconventional consumer information in combination with
the conventional credit sources such as credit bureau
reports to predict creditworthiness of a customer.

• ACD is used by Alternative lenders to assess the credit

worthiness of an individual before lending.

What are the types of data sources

• There are two types of data sources: Conventional:

Demographic Data & Bureau Data
• Unconventional: Social data, location information,
transaction behavior etc.
4

Digital Lending: Industry Examples

 4.1a Digital Lending: Industry Examples in India

Company Name Offering Overview

• Provides short term, small ticket size loans at point of checkout at a wide variety
of online-merchants
• Eliminates payment step at merchant, significantly improving checkout
conversion

• Machine learning technology allows it to lend to consumers who might not

qualify for credit cards, utilizing additional data, such as ecommerce payment
behavior

• FlexiLoans.com is a pure digital lending FinTech platform that provides

paperless, collateral free working capital financing to small and medium
business across India

• Its proprietary technology and algorithms are built to remove the friction points
in the borrower’s application process, data gathering, credit decisioning,
scoring, loan funding, customer servicing, regulatory compliance and fraud
detection
 4.1b Digital Lending: Industry Examples in India

Company Name Offering Overview

• Instant small business loans using creative alternative data to underwrite loans
and reduce dependency on documentation

• Partnerships with merchant aggregators provide access to merchant and Small

and Medium Enterprises’ (SMEs) sales information

• Provide finance management services in exchange for data on SME

performance for better underwriting

• Digital financial community that connects borrowers and investors, providing

different forms of credit and investment options

• Pairs borrowers and investors based on built in algorithms

• Provides additional services related to loan servicing and collections

 4.2 Popular Digital Lending Platforms
18 1 2

Mobile Invoice
15 16 17 Lending Finance
3
SME Digital
Lending Mortgage

Alternate
Lending
13 14 P2P Models Virtual 4 5
Lending Credit Lines

Point of Sale Debt

(PoS) Lending Collection
Wholesale
10 11 12 Mortgage 6 7
Financing

8 9
End of Module