Digital Lending: Every Step From Consent to Repayment

Almost every confusion about this subject starts by getting one thing wrong, so start with that one thing. Nothing in the route below is a new step. A branch did every one of them. Somebody walked in, somebody asked for their papers, somebody looked them over, somebody wrote out the terms, somebody handed over a draft, somebody took the instalments at a counter and somebody eventually wrote closed across the file. Every step of a digital loan has a paper ancestor, and the route is not new; what is new is that each step is performed by software, often by a different party from the one that performs the next, and in minutes rather than weeks.

The requirements attached to each step therefore matter more now than they did. When one person in one building did all nine steps, the person was the join. If the terms had not been explained, the same person who failed to explain them was standing there when the money was handed over. Split those nine steps across four parties and three systems and the joins become the weak points. A join is where something can be skipped by everybody at once, each assuming another party did it.

Why is the whole route built for speed?

Follow the money backwards and the answer arrives on its own. Rukmini Finance Limited is an invented finance company that lends and takes no deposits. Rukmini Finance has to buy its money in the market before it can lend any of it, and it has bought Rs 14,400 crore of it. The cost of borrowingsWhat a lender pays for the money it has raised, expressed as a rate for a year. The cost of borrowings is the price of the funding side of the business, settled earlier in this sequence. is 8.50 per cent a year on that Rs 14,400 crore, so the bill for the year is Rs 1,224 crore. Split that twelve ways and it is Rs 102 crore a month. Divide it by 365 days and it is about Rs 3.35 crore a day.

Rukmini Finance pays that Rs 3.35 crore a day whether the money is out on loan or sitting in its own account doing nothing, so money raised and not yet lent costs the lender every day it waits, and a route that turns an application into a disbursal in minutes is first of all a funding decision. Think of a stall taken on rent by the month outside a market. The rent runs from the first of the month whether the shutter goes up on the second or the twentieth, and every closed day is paid for out of the days that are open. Borrowed money behaves the same way. The clock does not wait for a decision.

Now the honest second half. An account written from inside the industry usually leaves it out. The borrower who needs the money this week benefits from exactly the same speed, and both things are true at once. A route that answers in minutes is worth something real to somebody with a bill to meet, and an account that presents the funding arithmetic as though it were a favour to the borrower has dressed one motive as the other. Both hold at once. The lender built the speed because idle money is expensive; the borrower gets a faster answer because the lender built it.

What are the steps, in order, from first contact to closure?

Nine steps, worth learning as a list because every question about the route hangs off it. Reach the borrower. Take consent. Establish identity. Gather information. Decide. Give the terms in writing. Move the money. Service the loan. Close it, and report the closure. The nine steps run from a first message to a discharged obligation, and the last two are the ones most often forgotten.

The order is not a convention that a clever lender could improve on; it is a dependency chain, where each step is only possible because the one before it happened. Nothing can be gathered before consent is taken. Gathering without consent is not a faster version of the same step but a different act. Nothing can be decided before the information arrives. A decision without information is a guess wearing the same clothes. No money can move before the terms are given. Money that moved first has made an agreement out of an event. And nothing can be closed that was never recorded as opened.

What does consent actually cover, and what does it not?

Consent is the second step, and folding it into a list of nine is exactly how an account of this subject goes wrong. Tapping a box is not the event. The event is a person agreeing that a named party may read named things about them for a stated purpose and hold them for a stated time. Agreeing to share something is not the same as understanding what will be read out of it, and a consent that a person cannot describe afterwards has completed its paperwork without doing its job.

The everyday shape of it is familiar. Handing over one key to a neighbour so they can water the plants is a different act from handing over the whole bunch so they can water the plants. Both are consent. Only one of them can be described afterwards by the person who gave it. The test of the second step is not whether a record exists that consent was taken; it is whether the person who gave it could say, a week later, what was taken, who has it and until when.

How is identity established before any money moves?

The third step asks a narrow question and it is worth stating the question rather than the procedure. Establishing identity is there to make sure that the person taking on the obligation is the person the record will be held against, and that protects the borrower at least as much as it protects the lender. Read it from the lender's side and it looks like a check on a stranger. Read it from the other side and it is the only thing standing between a person and an obligation created in their name by somebody else. Explaining away such an obligation takes years.

The Reserve Bank of India at rbi.org.in sets what the check consists of, what may be used and what has to be satisfied before an account is opened or a loan is made, and those requirements move. A list of acceptable proofs written from recollection could already be wrong, and wrong in a way a reader could not detect from the text itself.

Who takes the decision, and does the loan belong to whoever took it?

How a lending decision is made was settled at the opening of this sequence, so the fifth step takes that work as done. The fifth step receives what underwritingThe work of settling whether to lend, how much, at what price and on what terms. Underwriting was covered in full at the opening of this sequence and is used here rather than rebuilt. produces: a price for a range of outcomes, and four settled things, being whether to lend, how much, at what price and on what terms.

One fact belongs only to the digital route: the decision may be taken in seconds by software running inside one party while the loan itself sits on the books of another. The party that found the borrower may not be the party that carries the loss. The party that scored the application may not be the party the borrower can complain to. The separation between deciding and owning is the reason the next three steps, the written terms, the money movement and the servicing, carry the weight they do. When one person in one building did everything, those three steps were joins inside a single head. Now they are joins between organisations.

What has to be given to the borrower in writing, and when?

Before the agreement is made, not after it, and that word before is doing most of the work in this part. The sixth step exists so that a person about to take on an obligation learns its size and shape while they can still decline it. The list of what has to be plain is short: what is being borrowed, what will be repaid in total, when each amount is due, what happens if a date is missed, and what the whole thing costs, expressed the same way every time so that two offers can be set side by side without arithmetic.

A cost that a borrower could only discover by computing it themselves has been disclosed to a document rather than to a person, and the obligation to make it plain sits on the lender. The lender wrote the document and chose its wording. The test moves from whether a fact appeared somewhere to whether a person could reasonably come away knowing it. The Reserve Bank of India at rbi.org.in sets what a lender must actually tell a borrower about the whole cost of a loan before it is taken, and that requirement moves.

Where does the money go, and why does the route matter?

The seventh step looks like the least interesting one on the list and is the one where the most can quietly go wrong. Money leaving a lender and reaching a borrower has to travel, and the shape of the journey is the point. Money moving from the lender to the borrower and back again should be traceable end to end between named accounts. A route that stops at a party which is neither the lender nor the borrower is a different arrangement, with different consequences for everybody standing in it.

Two things sit in this part and they are easy to confuse. A payment system carries money; it does not keep it. Setu Payments Limited, invented, is a rail: the money passes across it in the way a wedding gift passes through the post, and the post is not a person who was given the gift. A party that receives the money into its own account and later passes it on is not a rail. A party like that is a stop. Between a rail and a stop there is a difference that matters when a payment goes missing, when somebody has to prove what was paid, and when a party in the middle stops answering. The route the money must take between the lender's account and the borrower's is set by the Reserve Bank of India at rbi.org.in, and it moves.

Can a borrower step back out after taking a loan?

Most people assume the answer is no. There is an arrangement by which a borrower may step back out of a loan shortly after taking it, and knowing that it exists changes what a rushed decision costs. A route built to answer in minutes produces decisions taken in minutes, and a way back out is what keeps a fast decision from being a final one.

The arrangement, the period, what it costs to use it, and every condition inside it are set by the Reserve Bank of India at rbi.org.in, and they move. The shape holds even when the detail moves: the arrangement exists, it is not a favour, and the place to find what it currently says is the address in the row rather than an account written some months ago.

What happens after disbursal, while the loan is running?

Servicing is everything done while a loan is alive. Taking the repayments. Keeping the record straight. Answering a question. Handling a part payment, or a payment made twice. Following up an amount that has not arrived. Servicing is the longest step by time, usually by a wide margin, and it is the one that decides whether the lender ever sees the money back.

A digital channel reaches somebody directly and repeatedly at almost no cost per contact. One property makes a helpful reminder cheap and makes pressure cheap by exactly the same mechanism. There is no separate switch for the two. A neighbour who can knock on the door at any time is a good thing on the evening the milk was left outside and something else entirely on the fourth evening in a row. The channel does not know which it is doing. The Reserve Bank of India at rbi.org.in sets both the conduct required of anybody recovering what a lender is owed and the grievance route a borrower has, and both move. Collection practice described from recollection would be a description of something that may already have changed.

How does a loan end, and what has to happen after it ends?

Three things have to happen, and most people can name one of them. The obligation is discharged, meaning the last amount owed is paid. The lender's own record is closed, meaning its books stop carrying the loan as live. And the closure is reported onward to the credit information companyA body that collects what lenders report about obligations and returns it to them on request. How such a body holds an entry and how an entry is corrected were settled earlier in this sequence., and the record everybody else reads then shows the loan as ended.

The third one is the one that gets missed, and it is the only one of the three whose cost falls entirely outside the lender. A person who has repaid in full and whose closure was never reported onward is carrying an obligation in the record that no longer exists. Nothing they did caused it. Nothing they can do alone fixes it. The next lender that reads the record, and the credit scoreA number produced from what a credit information company holds, used by lenders as one input. How it is produced was settled earlier in this sequence. built from it, are both working off something the record says is live and that in fact ended months ago.

What does a day of this route actually cost the lender?

A number without a denominator beside it teaches nothing, so put the funding clock back beside the rest of the business. Rukmini Finance carries assets under managementThe total of what a lender has out on loan and manages on its own books, used as the base for its percentages. Assets under management are a stock at a date, not a flow for a year. of Rs 18,000 crore for the year, and everything below is struck on that same base so the lines can be added and subtracted without changing denominators.

Now the division that makes the speed land. One day of borrowed money costs about Rs 3.35 crore, and the whole year's profit before tax is Rs 450 crore. Divide the second by the first: Rs 450 crore over Rs 3.35 crore is about 134, so roughly 134 days of funding cost would consume the entire year's profit before tax. A lender whose year's profit equals about 134 days of its own funding bill is a lender for which idle days are not a detail, and that single division is the whole explanation for a route measured in minutes.

Two kinds of figure are missing from the account above, and quietly filling them would be more convincing and less true. Application counts, approval rates, the time to a decision, the time to a disbursal and the drop off at each step are a lender's own numbers and are not published, and fees, charges and penalties are set lender by lender and change. A plausible wrong charge is worse than a missing one. Somebody reads it as what they should expect to pay.

How does somebody assessing a digital lender read this route?

Turned around, the whole route becomes a checklist, and an analyst covering the sector works through roughly that list. The first question is which of the nine steps this lender performs itself and which are performed for it by a lending service providerA party that sources, services or collects loans on a lender's behalf without the loan sitting on its own books. The authority named in the row below sets what is required of such a party.. A lender that has outsourced reach, servicing and collection has outsourced most of what a borrower will ever experience of it while keeping all of the loss.

The second is where the money rests on its way out and on its way back. Reading the seventh step as a diagram rather than as a sentence in a report answers it. The third is whether the eighth and ninth steps have staff, systems and somebody senior attached to them, or whether they are a queue nobody has looked at. An analyst who has read a lender's growth figures and not asked who answers the phone in month nine has read half of the business. The same three questions serve a lender's own board, a warehouse funder deciding what to lend against a pool, and anybody trying to work out why a book that grew quickly stopped performing quietly.

What did not become digital?

The obligation. Everything above can make it feel as though something fundamental changed. Nothing fundamental changed. An amount owed by somebody on a date is exactly what it was before any of this, and all nine steps are ways of creating, recording, funding, servicing and closing that same obligation faster and with more parties involved in it.

Which is why the route is worth learning as a route. Speed did not make the obligation smaller, consent did not make it optional, software did not make it forgiving and a rail did not make it somebody else's. The obligation sat there through all nine steps, unchanged, and it is still sitting there on the day the closure is reported. The ninth step is not administrative housekeeping for the same reason: it is the only step that tells the world the obligation has stopped existing.