On Wednesday, Bajaj Finance was ordered to halt extending loans through two products that did not conform with digital lending standards.
The technological challenges, which also include clunky legacy systems, difficulties integrating data, and difficulties finding talent to build systems, arise as competition for deposits and the formation of stickier customer relationships increases.
The ambitions of Indian lenders to expand their digital reach and capture a greater piece of business in the world’s most populous country risk being thwarted by outmoded technology, laws, and a skills shortage.
On Wednesday, the country’s largest shadow lender, Bajaj Finance Ltd., was ordered to halt issuing loans through two products that did not conform with digital lending standards. Earlier this week, the state-run UCO Bank briefly halted its online fast payments system after some accounts were credited without the lender receiving the funds.
And Bank of Baroda, one of the major state-backed lenders, is investigating abnormalities in client onboarding to its mobile app.
The technological obstacles, which also include bulky legacy systems, issues integrating data, and difficulty sourcing people to construct systems, arise as competition for deposits and the formation of stickier client connections intensifies.
Banks and shadow lenders have been actively extending their reach in underserved areas to recruit new consumers, establishing branches and signing up additional customers through digital apps. According to a survey by consulting company McKinsey & Company, banks were digitally sourcing 40% to 60% of retail asset loans.
“Tech resilience is the most critical topic that keeps people awake today on tech infrastructure,” said Peeyush Dalmia, a senior partner at McKinsey who oversees the banking business in India, in an August media interview.
According to Dalmia, most financial institutions were using outdated systems that needed to be modernized, with many banks not fully understanding the issues or how to remedy them.
Still, financial services firms are striving to solve the difficulties, forming in-house teams and collaborating with fintechs to strengthen their IT systems. According to Dalmia, banks in India spend between 5% and 8% of their earnings on establishing IT infrastructure.
“The quantum of money being spent is just incredible,” Dalmia went on to say.
According to A.M. Karthik, co-group leader, financial sector ratings at ICRA Ltd., smaller shadow lenders and financial institutions are more nimble than their larger counterparts with massive volumes to integrate and manage.
“The question is how effective they are?” Karthik explained. “It is too early to say.”