Indian lenders' tech challenges frustrate efforts to grab market share

Bajaj Finance was directed on Wednesday to stop offering credit via two products that failed to comply with digital lending rules

By Preeti Singh

Indian lenders’ ambition to expand their digital reach and capture a larger share of business in the world’s most populous nation risk being frustrated by outdated technology, regulations and a talent crunch.

The country’s largest shadow lender Bajaj Finance Ltd. was directed on Wednesday to stop offering credit via two products that failed to comply with digital lending rules. Earlier this week, state-run UCO Bank temporarily suspended its online instant payments system after some accounts were credited without the lender actually receiving the money. And Bank of Baroda, one of the largest state-backed lenders, is probing irregularities related to the onboarding of customers to its mobile app. 

The technology challenges, which also include clunky legacy systems, difficulties in integrating data and problems finding talent to build systems, come as competition increases for deposits and to form stickier customer relationships.

To attract new clientele, banks and shadow lenders have been aggressively expanding their footprint in under-served areas by adding branches and signing up more customers through digital apps. Between 40% to 60% of retail asset loans were being digitally sourced by banks, according to a report by consulting firm McKinsey & Company.

“Tech resilience is the most critical topic that keeps people awake today on tech infrastructure,” Peeyush Dalmia, a senior partner at McKinsey, and who leads the banking practice for India, said in a media interaction in August. 

Most financial institutions were working on old systems that needed modernization, Dalmia said, with many banks not fully understanding the problems or how to solve them.

Still, financial services companies are working to address the issues and have been building their in-house teams and partnering with fintechs to make their technology systems more robust. Banks in India spend between 5% and 8% of their revenues on building their technology infrastructures, according to Dalmia.

“The quantum of money being spent is just incredible,” Dalmia said.  

Smaller shadow lenders and financial institutions are more agile compared to their larger competitors with huge volumes to integrate and manage, according to A.M. Karthik, co-group head, financial sector ratings at ICRA Ltd.

“The question is how effective they are?” Karthik said. “It is too early to say.”