The story so far: On August 17, the Reserve Bank of India (RBI) commenced a pilot programme endeavouring to evaluate the feasibility of the ‘Public Tech Platform for Frictionless Credit’. The announcement was first made when the central banking regulator enumerated developmental and regulatory policies following the conclusion of the Monetary Policy Committee (MPC) meeting on August 14. The suggested platform would strive to “enable delivery of frictionless credit by facilitating seamless flow of required digital information to lenders.”
What is the platform for?
Digital delivery of credit (or delivering credit/loans though digital means) is preceded by a process of scrutiny known as credit appraisal. The process attempts to evaluate and accordingly predict the prospective borrowers’ ability for repayment of credit/loan and adhering to the credit agreement. The process rests on three important pillars, namely, the problem of adverse selection (that results from the asymmetry of information from either the borrower or lender), measurement of exposure risk and the assessment of default risk (the probability that the borrower may default in repayment).
This pre-disbursal process is particularly important for banks since it would in turn determine their interest income and impact on the balance sheet.
The central banking regulator has observed that the data required for the process rest with different entities like central and state governments, account aggregators, banks, credit information companies, and digital identity authorities.Thus, being in separate systems, it creates “hindrances in frictionless and timely delivery of rule-based lending,” the regulator notes.
This new platform would bring all of it together in a single place.
To facilitate “frictionless” and “timely delivery” of loans, the central banking regulator had instituted a pilot project for digitalisation of Kisan Credit Card (KCC) loans, of less than Rs 1.60 lakh, in September 2022. It tested “end-to-end digitalisation of the lending process in a paperless and hassle-free manner”. The pilot is currently ongoing in select districts of Madhya Pradesh, Tamil Nadu, Karnataka, Uttar Pradesh and Maharashtra. It provides for “doorstep disbursement of loans in assisted or self-service mode without any paperwork.” As per the regulator, the initial results were “encouraging”.
A similar pilot is being carried out for dairy loans based on milk pouring data with Amul in Gujarat.
What do we know about how the pilot works?
The platform is premised around the learnings from all the ongoing programmes, and further expands the scope to all types of digital loans. The public platform will be developed by its wholly owned subsidiary, the Reserve Bank Innovation Hub (RBIH). The proposed end-to-end platform will have an open architecture, open Application Programming Interfaces (API) and standards, to which all financial sector players would be able to connect seamlessly in a ‘plug and play’ model.
With the expansion and with participation of banks, the platform would extend its focus also towards dairy loans, MSME loans (without collateral), personal loans and home loans. It is expected to linkage with services like Aadhar e-KYC, Aadhar e-signing, land records from onboarded state governments (Madhya Pradesh, Tamil Nadu, Karnataka, Uttar Pradesh and Maharashtra), satellite data, PAN validation, transliteration, account aggregation by account aggregators (AAs), milk pouring data from select dairy co-operatives, and house/property search data. Thus, it would cover all aspects of farming operations (essential to understand the exposure and default risk for loans of the nature) alongside those necessary for ascertaining financial profiles.
The platform would be rolled out in a “calibrated fashion.” Based on the learnings from this project, the scope and coverage would be further expanded to include more products, information providers and lenders during the pilot.
What purpose does it serve?
Essentially, it would provide a basis for improved credit risk and overall credit portfolio management. Experts, including the World Bank, point out that improved access to information provides the basis for fact-based and quick credit assessments. It ensures that credit or other financial instruments are extended to a larger set of borrowers with good credit history. The borrowers too would benefit by the resulting lower cost of accessing capital, which would translate into productive investment spending (essentially, money spent for purchasing capital goods used in the production of capital, final goods and services).
Availing formal credit may entail multiple visits to the bank alongside cumbersome documentation. Depending on the type and nature of the credit instrument, further up to date information would have to be presented for perusal. All of this translates to higher operational costs for lenders which may also get distributed to borrowers. As per media reports, an RBI survey indicated that processing of farm loans took two to four weeks and cost about 6% of the loan’s total value.
All in all, the lending platform would bring about “reduction of costs, quicker disbursement and scalability,” RBI noted.
