When the government of India introduced IndiaStack, the largest open API-based technology in the world to enable digital infrastructure in the country, it got finance companies most excited. 

As early as a decade ago, state-owned banks used to require consumers to visit a bank’s branch, open a bank account first and only then start a cumbersome 3-10 days’ process of granting a loan without surety of definite approval. A minor glitch in processes meant the customer had to walk through the entire loan procuring cycle once again. 

With IndiaStack, the scenario has changed dramatically. Digitizing banking in a country with a  population of over 1 billion, however, is a daunting task, and progress has been incremental. 

Here’s what you need to know about applying for a personal loan in India, and how IndiaStack has simplified the process for consumers.

How IndiaStack Has Changed the Personal Loans Landscape

Loan seekers no longer need to undergo a completely physical process to procure a loan. Aimed at a presence-less, paperless and cashless service delivery, IndiaStack has specific features that enable users access to financial services with the click of a button. 

Aadhaar, a verifiable 12-digit identification number issued by the Unique Identification Authority of India based on a customer’s biometric and demographic data, has emerged as the primary force behind India’s financial inclusion efforts via IndiaStack. 

The Indian government has pushed citizens to link their Aadhaar numbers with a host of services, including mobile SIM cards, bank accounts and the Employees’ Provident Fund Organisation, among others. The result is easy tracking of important personal details that are needed by financial institutions at the time of granting a loan. To date, 339 million bank accounts have been linked to Aadhaar. 

From the identity of a borrower to their repayment capabilities, data is available real-time via Aadhaar, making granting loans based on more reliable security measures possible. 

To complement a customer’s complete digital journey, IndiaStack enlists the eKYC, which allows businesses to perform the Know Your Customer (KYC) verification process digitally. This process uses biometrics or a unique code sent via mobile. The eSign, which has an open API to facilitate an Aadhaar holder to digitally sign a document. It also uses the DigiLocker, a digital platform for issuance and verification of documents and certificates that eliminates the use of physical documents. 

Digital payments associated with the loan are carried out via the Unified Payments Interface (UPI), which is touted as one of the safest in the world by the Indian government.

These four digital offerings save time and money involved in physical interaction and procurement, and they eliminate the fraud risks associated with loan applications. This has spurred massive interest by big banks and non-banking financial companies to eye a larger piece of the digital loans pie. 

How Can Consumers Get a Personal Loan?

The government’s effort via IndiaStack has been bolstered by the digital services created by large financial players who have innovated their existing infrastructure, as well as by digital startups who have brought new methods to simplify the digital loan journey for consumers. 

All state-owned banks, private banks and non-banking financial companies (NBFCs) are offering loans to consumers digitally and currently use digital services to make loans available to consumers. 

To get a loan using the digital platform, customers need to follow some basic steps. 

1) Choose Your Bank

India has 12 public sector banks, 22 private banks (other than the 43 regional rural banks), 10 small finance banks and six payments banks. With IndiaStack being a national project, you can easily choose the bank that suits your needs. 

Some things that you must look for when choosing a suitable bank are comparing the interest rates, factoring in processing and handling fees if any, repayment terms and conditions and finally options for pre-payment of the loan and any penalties associated with it. 

2) Choose Best Interest Rate

All banks have their own metrics to decide on the interest rate that customers need to pay on personal loans. You’ll have to carefully check to evaluate the best interest rate option for yourself. This, too, can be done digitally by either visiting the bank’s website or speaking to a phone banking officer or a personalized chatbot on the bank’s website or app. 

The average interest rate for personal loans in India is currently 11-12%, with some banks offering as low as 9.8% depending on the loan value. 

3) Ensure Your Documents Are In Place

For a loan disbursal under 10 minutes, you’ll need to ensure all your documents are in place. Mandatory documents include bank statements from the last six months, your Aadhaar card, which will have your Aadhaar number that’ll help verify your proof of identity and residence and salary slips in case of salaried employees or proof of continuity of business for business owners.  

4) Apply

You choose your bank based on the interest rate they’re offering on personal loans. Once the documents are all in place, go ahead and apply. The application process triggers the bank to inquire about your requirements via phone banking and WhatsApp banking—which is picking popularity as Indians have started linking their mobile phones to their Aadhaar cards. 

Phone banking is simply the bank communicating with the customer via the interactive voice response technology, popularly called the IVR, that speaks to customers to resolve queries over a phone call. To enable WhatsApp banking, a customer has to give a missed call to the bank from their phone number registered with the bank and linked to their Aadhaar card. The bank in response sends a Whatsapp text message to the customer’s phone number to begin a conversation. WhatsApp banking is in its nascent stage of development in India and at the moment, most banks offering this service have an internal chatbot that assists the customers. 

This helps ensure a quick turnaround of your request.

5) Follow Up

This step is key to ensuring you get the best deal. Once you’ve applied, you would like the bank to make the necessary checks and finally approve the loan at the earliest. 

The easiest way to check if the bank has approved your loan is by entering your loan application number allotted at the time of applying for the loan on the “application tracking” tab on the bank’s website. For this, you must activate internet banking or net banking, which enables a customer to access their bank account via a unique account number and password. If you don’t have a loan application number, you can request for it by submitting your personal details such as your name, date of birth and registered mobile number via phone banking.

Growth of Digital Personal Loans

Most banks in India are trying to develop tech-enabled services to help customers have a smooth digital banking experience. 

For example, India’s biggest bank by market capitalization, HDFC Bank, that disbursed INR 115,500 crore ($15,360,185.61) personal loans in FY19-20, has its own set of application program interfaces for secure exchange of information between the bank systems and its customers.  

Axis Bank, the third largest private bank in India, declared that over 44 percent of personal loans in FY2020 were sourced digitally. 

This growth in digital lending is also cheered by pure digital financial players who think the coronavirus pandemic will only strengthen the cause for digitization of the lending process. 

Gaurav Chopra, the CEO of IndiaLends that operates as a marketplace for consumer loans online, says with the coronavirus pandemic kicking off social distancing requirements, pure digitization of banking is finally happening in India and all major players are a part of it. 

“For a large personal loan to the tune of INR 10 lakh ($13,333), lenders preferred sending someone personally to collect verification documents and were willing to spend INR 500 ($6.67) for the labour force to fetch these physical documents. That’s not the case now,” says Chopra. 

He expects lending in India to go totally digital in the next 12-18 months owing to the pandemic. 

Anuj Kacker, the founder of MoneyTap, looks at India as a “phygital” market—meaning a combination of physical and digital components—which he is confident can transform to completely digital in the coming years. 

His five-year-old startup, which has 10 million registered customers, has innovated digital lending by offering a credit line loan that customers only have to pay interest on when they use the money. He expects aspirational Indians to embrace digitized offerings sooner rather than later.

Challenges in Applying for a Personal Loan

The same technology that assists a quick loan process can also be a deterrent and is considered one of the top reasons for consumers to drop out of the digital lending process. 

For a loan’s digital journey to be successful, customers need to ensure they comply with all requirements of the IndiaStack infrastructure. These primarily include getting your Aadhaar card made and linking your Aadhaar card to your bank account.

Some other important steps also need to be kept in mind. 

The residential address on the Aadhaar card of a customer becomes important for verification. Aadhaar can have only one address, and as long as your current address and permanent address match, the journey can be done digitally. When the address match algorithm fails, the digital journey also fails.

Also, in cases when the mobile number of the customer is not linked with the customer’s Aadhaar card, there is no way to proceed with the loan disbursal. 

The third drop happens when the banks do a video KYC, which is a mandatory process by banks in India. While the popularity of mobile phones has jumped dramatically with the sharp fall in data prices and rise in availability of cheap mobile handsets, many customers do not have a front-facing camera. A bank fails to complete the video KYC in such a case, leading to a fallout of the journey. 

Besides physical challenges, it is sometimes mistrust that keeps customers away from taking a loan digitally, says Chopra. “There is an overarching sense in the 30- to 35-plus category who fear misuse of their personal bank statements and important personal details online.” 

Hope for a Recovery Will Fuel Loan Demand

Traditionally, India has been a savings-led economy. With finance becoming easily available and growing exposure to the global consumption ecosystem, India’s spending mindset is changing. 

Indians are no longer waiting for their 30s to buy an expensive car or a good mobile phone. Also, since India’s debt-to-income ratio is still quite low compared to other world economies, the prospects of Indians taking personal loans to meet their aspirations remain bright. 

While lending activity is expected to be muted both from the lender side and the consumer side due to the coronavirus, a financial recovery is imminent with the economy slowly opening up.