Protecting borrowers in the digital era

Live Mint



Digital lending has the potential to benefit Indians immensely, but it also poses some major risks


What is Digital lending?

Digital lending consists of lending through Web platforms or mobile apps, by taking advantage of technology for authentication and credit assessment


Significance for India

  • Unmet credit needs: There is a huge unmet credit need (approximately $400 billion plus per year), particularly in the microenterprise and low-income consumer segment in India
    • Borrowing from informal channels: Indians continue to borrow from family and friends, and moneylenders, sometimes at unreasonably high interest rates, primarily because these loans are more flexible and convenient
    • Inability of formal lenders: Institutional lenders are unable to lend without appropriate collateral, and the high costs of lending limit the flexibility of lending products


Enabling inclusive lending: Digitization can help

Inclusive lending means making credit available to all the sections of society at affordable costs

  • India has the perfect set of conditions for digital lending which includes the fact that it is the only country in the world with a billion unique digital IDs and more than 600 million mobile-phone users


Author states that digitization can help to achieve purpose of inclusive lending. Digital data trail can be instrumental in this respect


What is a digital data trail?

It refers to the histories of an individual’s past digital activity, such as phone call and SMS records, remittance data &social media footprint

  • Inclusive digital lending: Digital footprint that can be tracked, archived and used for credit assessments, opens up the potential of inclusive digital lending. Lenders can utilize digital trail to offer credit to low income groups in India. Around 40 Start-ups are already active in this segment in India


What is an API?

It is a set of functions and procedures that allow the creation of applications which access the features or data of an operating system, application, or other service


Read More: API has been explained quite beautifully here


What is India Stack?

India Stack is a complete set of API for developers and includes the Aadhaar for Authentication (Aadhaar already covers over 940 million people and will quickly cover the population of the entire nation), e-KYC documents (safe deposit locker for issue, storage and use of documents), e-Sign (digital signature acceptable under the laws), unified payment interface (for financial transactions) and privacy-protected data sharing within the stack of API.

  • Together, the India Stack enables Apps that could open up many opportunities in financial services, healthcare and education sectors of the Indian economy
  • What this essentially means is that developers and tech startups can now build software and create businesses around the readily available infrastructure offered through India Stack, thus opening a huge potential to tap into the booming smartphone market in the country


Note: Inclusive digital lending in India also utilizes ‘India Stack’


Risks involved

There are three major risks in the digital lending space that the Indian borrowers may face

  1. Overlending: Because there is no centralized tracking of lenders and borrowers in the digital lending space, it is possible that people will end up borrowing “too much” from multiple lenders that they cannot pay back
  2. Unsuitable lending: Indians—especially the marginalized, less literate consumers—may choose the wrong loan because of unclear disclosure of terms around, for example, interest, repayment time, and qualifying terms and conditions
  3. Misuse of personal data: Sensitive data can be shared or sold without proper consent, as data is controlled by under-regulated non-state actors. These risks may very well lead to another lending bubble, with unintended consequences, like the one that India witnessed with the microfinance institutions crisis in 2010


Read More: Causes of Microfinance crisis, Microfinance: To hell and back, Why is bad word all over again?


Measures to mitigate risks

  1. Institute strong data-sharing protocols: Because several players will have access to sensitive consumer data, there must be clear guidelines around, for example, the type of data that can be held, the length of time data can be held for, and restrictions on the use of data
  2. Put in place a code of conduct for lenders: Like the Microfinance Institutions Network code of conduct, digital lenders should proactively develop and commit to a code of conduct that outlines the principles of integrity, transparency and consumer protection, with clear standards of disclosure and grievance redress
  3. Super-credit bureau: Explore the possibility of creating a “super credit bureau” that tracks all digital loans and consumer/lender credit history
  4. Strengthen and scale the DigiLocker initiative, which has the potential to be a safe repository of individual data, with access rights controlled by the individual


What is DigiLocker?

DigiLocker is a key initiative under Digital India, the Indian Government’s flagship program aimed at transforming India into a digitally empowered society and knowledge economy. DigiLocker ties into Digital India’s visions areas of providing citizens a shareable private space on a public cloud and making all documents / certificates available on this cloud

  • Paperless governance: Targeted at the idea of paperless governance, DigiLocker is a platform for issuance and verification of documents & certificates in a digital way, thus eliminating the use of physical documents
  • Dedicated cloud storage space:Indian citizens who sign up for a DigiLocker account get a dedicated cloud storage space that is linked to their Aadhaar (UIDAI) number
  • Documents & certificates in locker:Organizations that are registered with Digital Locker can push electronic copies of documents and certificates (e.g. driving license, Voter ID, School certificates) directly into citizens lockers
  • Storage and esigning of legacy documents: Citizens can also upload scanned copies of their legacy documents (any old documents like old drivers licence or an old ration card etc.) in their accounts. These legacy documents can be electronically signed using the eSign facility


The platform has the following benefits:

  1. Citizens can access their digital documents anytime, anywhere and share it online. This is convenient and time saving
  2. It reduces the administrative overhead of Government departments by minimizing the use of paper
  3. Digital Locker makes it easier to validate the authenticity of documents as they are issued directly by the registered issuers
  4. Self-uploaded documents can be digitally signed using the eSign facility (which is similar to the process of self-attestation)


Way forward

Authors suggest that it is the responsibility of the credit providers to invest in more user-friendly products: developing intuitive products that will help consumers better understand loans and consent protocols so they can make truly informed choices



Authors conclude by stating that India is on the verge of a digital lending revolution and ensuring that this lending is done responsibly can ensure the fruits of this revolution are realized

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