Digital Lending and Nepalese Context
Digital Lending is a practice of lending through online platforms or other mobile applications utilizing cutting-edge technology for authentication and credit assessment with the aim of facilitating a more efficient and quick payment service. Buy Now Pay Later (BNPL) is a popular form of short-term digital lending that allows consumers to make purchases and pay for them at future date, often interest-free. So, digital lending is interchangeable with the word BNPL. Traditional lending is typically offered to prime or sub-prime customers and has a lengthy application process that includes, but is not limited to, opening a bank account, documentation, income verification, undergoing a thorough credit assessment, mortgaging property followed by disbursement in part or full. Whereas, the BNPL offers an instant loan to customers who has regular banking transaction and good credit history which are categorized into three types namely fixed, flexible, and micro-loans considering the time, the volume of credit, and repayment schedule. To have the real experience of frictionless digital lending, the BNPL offers should be tech-driven, seamless, and embedded.
To experience BNPL, a person who may or may not be an existing customer of the BNPL offering company should visit the physical or online store of the merchant for buying products. While making payments, the eligible person will be offered a checkout option with BNPL for the eligible amount and associated terms and conditions. If agreed, the payment will be processed by the company to the merchant on behalf of the customer without deducting the bank balance but booking a due. The customer’s account will be automatically deducted on the scheduled date for the settlement of such due amount.
Digitization of the lending process brings a number of benefits for stakeholders, including better decision making, improved customer experience, and significant cost savings creating rare win-win-win opportunities for customers, banks/Payment Service Providers (PSPs), and merchants.
Customers are benefited because they are given an additional credit period at no or low cost, and spreading payment over several months makes the high-value items more affordable, even if they have a limited/low income. BNP technology or platform providers, such as banks and PSP benefit from increased customer base and engagement. It opens up the possibility of increasing fee-based income and interest income in the case of medium or microloans. Moreover, it is also advantageous for merchants by reducing sticker shock, increasing sales conversion ratios, and encouraging repeat purchases. The purchase history at a merchant could provide an opportunity to offer right product to right customer at right time reducing the pressure of Merchant Discount Rate on its business.
A BNPL is sometimes misunderstood as a digital form of a plastic credit card, but it is entirely different. The credit card requires an income assessment, a standard approval process similar to traditional lending, and the issuance of a physical card by a switch with a one-time issuance fee and recurring renewal charges. However, BNPL does not require all of these, it is just a click away, with or without a nominal fee.
Context of Nepal
With shifting market dynamics and a favorable regulatory framework, the scope of digital lending or BNPL in the Nepalese market is highly likely. The guideline issued by Nepal Rastra Bank in 2078 on Digital Lending is self-explanatory to establish its priorities on the digital landscape. The guideline has the provision of allowing loans up to Rs. 500,000 to customers with payroll accounts or those with professional or business income while others have a maximum ceiling of Rs.300,000 with the highest tenure of 3 years. The limit on tenure and loan amount has been defined taking into consideration the risk involved, the readiness of the infrastructure for client verification and identification, and the digital credit assessment.
To further fuel it, the monetary policy has declared this year as an electronic payment transaction promotion year. The prediction of credit growth of the private sector by 12.6% and resumption of countercyclical capital buffer on capital adequacy offers limited room for sizable loans or investments. So, this seems the ideal time for the banks to be more innovative and competitive in collaboration with PSPs for offering small ticket size credits like BNPL. As the bank’s operation is heavily regulated and usually involve a bureaucratic chain, it would be advisable to have these offering via its subsidiaries rather than providing as it
Chartered Accountant from ICAN