1. Module 5
Digital Lending
Contents
1. Understanding Lending-An
Introduction
2. Digital Lending
3. Core of the Digital Lending
model
4. Digital Lending-Industry
examples

2. I
ntroduction
Hello, Iam Abhijeet.
Iam here to help you understand below mentioned topics today:
1. Lending
2. T
raditional lending
3. Digital lending
4. Alternative Credit Decision & alternate data sources
5. Industry examples
Let’s Begin!

3. 1
Understanding Lending-
An Introduction

4. In this section, we will understand about lending.
Let us understand it from our friends Abhijeet and
Sakshi
1.1a I
ntroduction to lending

5. 1.1b I
ntroduction to lending
Hi Sakshi, How are
you?
Hi Abhijeet, Iam fine.
How about you?
Iam good. You look
worried. What
happened?
Iam in need for
money and not sure
how to get the same
Why don’t you
borrow money from
a lender?
Who isa lender?
What options do I
have?
Lending isthe temporary
transfer of money with the
expectation that it will be
repaid with an interest
Iunderstand, but
who will give me this
money?
Lenderswill provide you the
same. These are generally
businesses or financial
institutions
ThanksAbhijeet. Can
you give me more
information on
lenders
There are two typesof
lenders:Traditional Lenders
& Digital Lenders

6. Below mentioned points should be remembered
What isLending?
• Lending isthe temporary transfer of money with the expectation
that it will be repaid with an interest. Generally, interest ishigher
if risk of not paying back the money ishigher
Who isa 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..
Points to remember

7. 1.2 I
ntroduction to traditional lending
Let me start with
traditional lenders
Sure. Please do.
Traditional lendersare bank (private,
public, co-operative),NBFC(large
and small) or MFIwhich provides
loans to businesses or individuals
These institutions are regulated
by RBIand must follow
designated rules in order to
provide any loans
They consider multiple factors
before they lend to an individual or
businesslike amount needed, cash
flows, & collateral provided
What are the
types of loan
they provide?
There are 2 typesof loans. First is Secured Loans
where the borrower keeps some asset as collateral
(as a guarantee) with the lender in return of the
money. E.g.:Home loan, Vehicle loan
Second isUnsecured Loans where no
collateral is provided to the lender by the
borrower. Example: personal loan, student
loans, credit card etc.
On what basisdo
they provide
loans?

8. Pointsto 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 flowsof an individual
• Collateral provided
There are 2 kindsof loans:
• Secured loans –collateral provided
• Unsecured loans –no collateral provided
Let us continue with the conversation..
Collateral
Asset that works as a guarantee for the
lender, in case the borrower fails to repay

9. 1.3 Gaps in traditional lending and need for digital lending
Supply vs demand gap
• Traditional lenders could not bridge the gap between credit demand and its
supply
Unable to finance
customers with I
nsufficient
credit history
• T
raditional lenders could only lend to the customers with sufficient and
credible credit history
• They require lot of documents which might not be available with all the
customers
Unable to finance
unqualified business owners
• T
raditional 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
2
3
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:

10. 1.4 I
ntroduction to Digital/ Alternate lending
Digital/ Alternative lending is providing loans
through online platforms that use technology to
bring together borrowerswho are underserved by
traditional lenders
These underserved borrowersrange from
small and medium enterprises(SMEs) to
individuals
Partner
Bank
Alternative
lending
platform
Individuals/
Consumers
Small and
medium
Businesses
Lenders/Investors
The key players in the digital lending ecosystem are
the borrowers: who could be individuals or small or medium businesses,
the lenders: who could be individuals or institutional investors, and
The partner bank: the bank who owns the platform
The alternative lending platform acts as a facilitator that connects the 3 key players

11. 1.5 Difference between a Traditional & Digital lender
Qualification
 Stricter requirements to qualify for a
loan. For example, business owners
should have excellent credit score
Traditional Lenders Digital Lenders
 Minimal requirements to qualify for a
loan. For example: Minimum credit
score orrevenue requirement are
much lower forsome digital lenders
Paperwork
 Requires significant amount of
paperwork and documentation
 Requires less paperwork and
documentation
Funding
Time
 Takesanywhere from few
daysto a few weeks to
provide the loan
 Takes 2-3 days to provide
the loan
Digital lending is advantageous over traditional lending with lesser paperwork, lesser processing time and lesser
qualification requirements.

12. Points to remember
Below mentioned points should be remembered
What isdigital/ alternative lending?
• Digital/ Alternative lending isproviding 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.

13. 2
Digital Lending

14. 2.1 Digital lending mechanisms
Let me start with
digital lending
mechanisms
Sure
There are several typesof
alternate lending models
Let’sdiscussin detail these 3
types:
• P2P lending
• Crowdfunding
• 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 fundinghas steadily increased visa visother Asian countries
That’s interesting.
Please explain these
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.

15. 2.2 P2P lending
Let me start with P2P lending. Peer-to-
peer (P2P) lending offers lower rates on
loans by connecting people-to-people
over the internet
The risk assessment is made through a
combination of the consumer’s
underlying creditworthiness, loan
amount and purpose
Lender 1
Lender 2
P2P platform firm
Lender3
Borrower (SMEs,
individuals, corporates)
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 P2Plending model
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 isgaining popularity as:

16. Type
Forms of
contributio
n
Forms of return
Motivation
of funder
Donation
Crowdfunding
Donation
Intangible
benefits
Intrinsic and
social motivation
Reward
Crowdfundin
g
Donation
pre-
purchase
Rewards but
also intangible
benefits
Combination of
intrinsic and
social
motivation and
desire for
reward
2.3a Crowdfunding
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
There are 2 typesof crowdfunding:
1. Community crowdfunding
2. Financial return crowdfunding
Crowdfunding isa 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 majortypes of crowdfunding:
1. Community Crowdfunding

17. 2.3b Crowdfunding
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
Type
Forms of
contribution
Forms of return
Motivation of
funder
P2P
Crowdfunding
Loan
Repayment of
loans with
interest
Primarily
financially
motivated
Equity
Crowdfundin
g
Investment
Return on
investment in
time if the
business does
well. Rewards
also sometimes
offer intangible
benefits,
another factor
for many
investors
Combination of
intrinsic, social
and financial
motivation
There are 4 typesof crowdfunding
These two are collectively known as
“financial return crowdfunding”
2. Financial ReturnCrowdfunding
While community crowdfunding is lending with a social benefit objective, financial
return crowdfunding is lending with the expectation of a return in the future.

18. 2.4 Direct Lending (FinTech NBFCs)
Have you understood
the two types of
digital lending?
Yes The next one isdirect 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 cheaperinterest rates than banks)
Compared to banks, NBFCshave benefitted by
leveraging technology to rapidly scale their
operations and to customize traditional processes
and change minimal borrower qualifications in order
to penetrate underserved segments
Main Segments they
target are individuals
like us and small
businesses
Regulatoristhe Reserve
Bank of India (RBI)
Who are the
regulators?

19. 2.5 I
ndustry trends in digital lending
Clear distinction
between business
models for developed
and developing
economies Emergence of digital loans
as a viable asset class
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
1
2
3
T
raditional playersare
reacting with agility
4
Evolving secondary
market for online loans

20. 2.5a I
ndustry 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

21. 2.5b I
ndustry 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

22. 2.5c I
ndustry 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

23. Seci
2.5d I
ndustry 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
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
*Securitizationis 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 riskof default on the house loans to the insurance company.

24. Pointsto remember
Below mentioned points should be remembered
What isP2P lending?
• Peer-to-peer (P2P) lending offers lower rates on loans by
connecting people-to-people over the internet.
What isCrowdfunding?
• Crowdfunding entails raising external finance from a large
group of investors over a platform.
What isDirect 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.

25. 3
Core of the Digital Lending model

26. 3.1 Alternative credit decision model (ACD)
Thanks Abhijeet. You earlier said that
digital lendersrequire less
documents, then how do they make
the decision to loan ornot?
Good question Sakshi. They use
alternate data sources for credit
decision. It iscalled Alternative
Credit Decision
Let me first tell you what are the traditional data sources used by
banks for credit appraisal of a borrower. Some of these are:
1. Bureau data such as: Credit accounts and applications,
address and IDverification 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 assessthe creditworthiness of an individual.
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
Sent to ACD engine having
algorithms for processing
Output is used for
taking decision
ACD Engine
(Algorithms)
Measure of creditworthiness
Alternative Credit
Scores

27. 3.2 Advantages of ACD
Main advantagesof Alternative credit
decision model(ACD) are:
Expand Scope
of customers
Increased
Accuracy of
Underwriting
• Leveraging alternate data sources expands the
scope of customers who can be catered to
• Applicants with less documents can now be
potential customers
• Increasing ability to accurately assess risk for a
subprime borrower, while keeping
documentation requirements for applicants
unchanged
Subprime borrower
Person considered to have relatively
high credit risk for a lender

28. 3.3a Alternate data sources used in ACD model
Please explain more
about the data sources
There are 2 typesof
data sources
Conventional &
Unconventional
Conventional
Sources
Demographic, Financial & Bureau Data
• Thisdata isused to assess the creditworthiness of the
borrower: i.e. whether the borrower would be able to
repay the loan with a reasonably low default risk
• Data used includes, income data, past repayment
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)

29. 3.3b Alternate data sources used in ACD model
Please explain more
about the data sources
There are 2 typesof
data sources
Conventional &
Unconventional
Unconventional
data approaches
and models
Social Data
Building more robust customer profiles based
on social media behavior and usage
Location Information
GPS information coupled with financial
transaction behavior
Transaction Behavior
Utilizing customer search, product, purchase,
payment behavior, telecom, Utility bill
payments
App based data access
Smart phones provide a host of data to
leverage -texts, emails, GPS, social-media
posts, retail receipts, conversation lengths

30. 3.4 Data sources used in retail lending
Alternate data can assist in developing
robust underwriting* modelsto
• Target new customer segments
• Reduce cost of acquisition
Digital loan applications,
• Reduce the cost of on-boarding (acquiring
the customer), thus making small ticket loans
feasible
• Provide access to valuable information for
existing and future customers
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
*Underwriting is the process banks follow to determine if the risklevel
associated with extending the loan to the borrower is within acceptable limits.

31. Points to remember
Below mentioned points should be remembered
What isACD?
• Alternative Credit Decision (ACD) involves leveraging of
unconventional consumer information in combination with
the conventional credit sources such as credit bureau
reportsto 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.

32. 4
Digital Lending: Industry Examples

33. 4.1a Digital Lending: I
ndustry Examples in I
ndia
Offering Overview
Company Name
• 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 itto lend to consumers who might not
qualify for credit cards, utilizing additional data, such as ecommerce payment
behavior
• FlexiLoans.com isa pure digital lending FinTech platform that provides
paperless, collateral free working capital financing to small and medium
businessacross India
• Itsproprietary 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

34. 4.1b Digital Lending: I
ndustry Examples in I
ndia
Offering Overview
Company Name
• Instant small business loans using creative alternative data to underwrite loans
and reduce dependency on documentation
• Partnerships withmerchant aggregators provide access to merchant and Small
and Medium Enterprises’ (SMEs) sales information
• Provide finance management services in exchange fordata on SME
performance forbetter 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

35. 4.2 Popular Digital Lending Platforms
Invoice
Finance
Digital
Mortgage
Virtual
Credit Lines
Debt
Collection
Point of Sale
(PoS) Lending
P2P
Lending
SME
Lending
Alternate
Lending
Models
Mobile
Lending
Wholesale
Mortgage
Financing
1 2
3
6
5
4
8 9
16
10 7
15
14
13
12
17
11
18

36. End of Module