B.S. Sivakumar
As smart consumers, we all love to whiz past the payment terminals at malls and shops with a mere tap or a quick scan of the QR code; it’s convenient, cost-efficient and even cognitively comfortable. Thanks to the maturing India Stack or the set of open APIs and digital public goods that swiftly unblocks and interlinks our individual identity, data, and payments to complete the process, we conduct our daily lives with far more ease and certainty. Such “frictionless payments” help reduce the customer’s struggles with payments at the last mile, thereby improving the shopping experience as well as the conversion rate for merchants.
Now, imagine the same efficiency when you are applying for a loan or a credit instrument. At the moment, applying for a home loan takes a minimum of a week or more before the lender can complete the document verification, legal formalities and then the eventual approval. The biggest impediment, however, is the sourcing and verification of data that needs to come from credit information bureaus, account aggregators and banks besides property registrars and local governments, confirming the legal ownership of the property to be bought.
First step towards Open Banking – varied sources on a unified platform: Inspired by the success of the India Stack, the Reserve Bank of India (RBI) is piloting the “frictionless credit initiative” or simply a public tech platform that would seamlessly bring all key information from disparate sources into a single dashboard to smoothen the underwriting process required for credit approval, in a fully customer consented and secure manner. Since the data comes from authentic sources, estimates show that such a unification of data would help lenders cut their customer acquisition cost by as much as 70% and for borrowers, it saves them at least 6% of the loan amount in charges with less stress in terms of uncertainty and more savings in opportunity costs.
Developed by the RBI Innovation Hub on the public tech platform for frictionless credit (PTPFC), the first pilot was kicked off in September 2022 with an all-digital Kisan credit card (up to ₹1.6 lakh per borrower, sanctioned without any collateral and in a matter for few minutes), dairy loans, un-collateralised MSME loans (up to ₹10 lakh on an average), personal loans, and home loans, in Madhya Pradesh and Tamil Nadu in April and then in Maharashtra, Uttar Pradesh, Karnataka, Gujarat in August. In the first pilot, an end-to-end digitalization of the lending process in a paperless and hassle-free manner was tested for most aspects including doorstep disbursement of loans in assisted or self-service mode.
Plug-and-play linkage for BFSI sector: The revolutionary product runs on the Open Architecture using the Open APIs and standardised protocols, allowing financial sector companies to connect in a plug and play manner. In a simple lingo, a lender can do a search (just like your Google search) on the platform that instantly compiles data from key sources like Aadhaar e-KYC, Aadhaar e-signing, account aggregation and PAN validation besides the critical land and registry records. The result is cost saving, quicker disbursement, and high scalability. Credit will be made available in the form both self-serve and assisted mode, enabling customers to choose their own comfort levels.
As of now, the pilot project has land records from Madhya Pradesh, Tamil Nadu, Karnataka, Uttar Pradesh and Maharashtra, land satellite data, transliteration (ability to convert documents in local.
language to English) and real estate property search data that are necessary for processing home loans while for dairy loans in states like Gujarat, the platform provides milk-pouring data from select dairy co-operatives. As more states and local bodies join the project, the entire loan processing and disbursal will become faster and more meaningful.
The progressive technological and regulatory development, since the launch of the TReDs (trade receivables discounting system) by the RBI in 2014 when it facilitated bill discounting, from a two-day exercise to a round the clock activity, aim is to replicate the same to retail loans, without any documentary or legal hurdles. For those with adequate credit history and rating, this could ease their lives, while for the new-to-credit customers, it could significantly cut down their waiting period, improving the overall experience.
However, constraints for financial institutions albeit in the short-run may include a viable digital switch from the current practice of storing documents sourced from customers in physical form, availability of PAN for all applicants, unregistered and non-digital land documents and potential challenges related to credit under-writing without diluting the regulatory standards.
The great leap in credit disbursal: In our collective digital journey, the next big leap is towards digital disbursement of credit, saving the key element of time in your life’s crucial decisions. The regulator has taken the first and the most decisive step to democratize the critical technology and a mindset change with innovations on the public tech platform. In the next, it may gradually withdraw from the process, handing it over to a private company or an institution like the National Payments Corporation of India (NPCI) to onboard more entities.
Given the immense growth prospects, the frictionless credit initiative may induce all intermediaries to incorporate enriched credit data into the lending ecosystem to serve the credit “unserved”.
(B S. Sivakumar is President & Head – Agri Business, Kotak Mahindra Bank Ltd.)
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