Lending takes turn for U: How new credit platform can be a game changer

Moving pieces need to be synchronised for Unified Lending Interface to work

Last fortnight, Reserve Bank of India (RBI) Governor Shaktikanta Das put the spotlight back on a drably termed year-old pilot project: Public tech platform for frictionless credit (PTPFC). “From now on, we propose to call it the Unified Lending Interface… just like UPI  (Unified Payments Interface) transformed the payments ecosystem, we expect that ULI will play a similar role in transforming the lending space”.

Developed by the Innovation Hub (RBIH), a subsidiary of the central bank, ULI is meant to enable seamless flow of digital information to lenders. It is to knit data residing with central and state governments, account aggregators, lenders of all hues, credit information companies, and digital identity authorities. “This will bring immense efficiency in terms of reduction of costs, quicker disbursement, and scalability,” says Rajeev Anand, deputy managing director, Axis Bank, which was part of the RBIH pilot when it was launched in August 2023. The RBI’s Report on Currency and Finance FY24 seconds his view: PTPFC cut the turnaround time of kisan credit card loans to less than an hour from a few weeks.

UPI’s counterpart

If ULI – at a commercial level – is to become UPI’s counterpart in lending, it will ask searching questions of RBI-regulated entities (REs).

As Rajesh Bansal, chief executive officer (CEO) of RBIH, puts it: “Data is just the starting point. The bigger issue is REs must rewire what’s under their bonnets.” And lets you on what’s below the radar (and which also amounts to part-censure in a way): “Businesses (of banks) are silo-ed and have to be integrated. Otherwise, it will not work to its potential. We have demonstrated to banks how this can be done. Now, it’s up to them to do the needful.” It can take the bank-fintech partnership to a higher orbit.

But can credit be frictionless?

According to R Gurumurthy, former head of governance at RBL Bank, “friction” is not a negative phenomenon to be done away with. “Friction in the credit process is intentional. It involves challenges to assumptions, understanding of profile, etc. embedded in the review of a credit application,” he says. And calls attention to recent RBI guidelines on model risk and governance. As he views it, “seamless” is a more appropriate word in this context where access to data (stored by multiple agencies) can be accessed via a plug-and-play process.

Data in itself means nothing. Take the RBI circular that credit information companies’ (CICs) update data on a fortnightly basis. It takes off from the Aditya Puri Committee report (2014) which made a case for rehauling the way CICs capture data. The systemic impact would be better quality of credit portfolios and free capital for credit growth. It will promote objective and transparent scrutiny and processing of credit, making it less expensive and it will aid bank supervisors to monitor build-up of systemic risks. Why has this come into sharp relief now? After runway growth in retail credit of questionable quality, especially unsecured credit, Mint Road upped the risk weighting on unsecured retail: To 125 per cent from 100 per cent.

There’s also a more fundamental difference we have to factor in.

“Unlike payments, credit involves dealing with depositor's money in trust,” says Amit Arora, a development finance expert. Hence, equal importance is to be given to strengthening repayment and collection processes. “One way to deepen financial inclusion and microcredit (including agri- and crop loans) is to leverage the business correspondent (BC) network in a calibrated manner by providing them with such tools (for sourcing and collections),” he notes. It brings us to a pain point.

Since its inception two decades ago, the bank-BC model has been seen as a low-cost approach; it thrived on the meagre commissions earned by ‘Bank Mitras’ (agents deployed by BCs on the field) linked to the transactions put through by them. Subsequently, while a penalty clause was put in, it was never acted upon. This was because of the channel’s low-income structure, fewer opportunities and potential in rural areas, of centres being classified as “difficult” (as decided by banks), low connectivity; and at times, non-payment of fixed allowances by banks. But some of them now slap a penalty of ~1,000 per month in case agents remain inactive for two months; and if perchance they are found operating another bank's portal or mobile app, they are to be terminated immediately with a penalty of ~10,000. So, why are banks acting tough? Blame it on their stiff financial inclusion targets (in recent years, banks have delegated a substantial part of branch tasks to Bank Mitras). But apart from a small lead-generation fee, BCs and Bank Mitras receive nothing for cross-selling savings deposits or loans. 

Financial inclusion

Take the RBI’s Financial Inclusion Index (FI-Index), which came into being from 2021 – a single measure of overall financial inclusion. According to a May 2023 paper by Indicus Foundation there’s a major flaw: The values of 97 parameters are not published. For 2022 even the values of the three sub-indices are not shared. A RBI statement, while releasing the overall index value for 2022, noted that there was growth in all three sub-indices without mentioning the quantum of growth. This holds true of 2023 as well. Sumita Kale, CEO and senior fellow at Indicus Foundation, says: “There is little benefit in publishing annual index values without an idea of what’s working better and what’s not. This index value orientation gives no direction to any of the stakeholders on where to focus – be it industry, policymakers at the state and central level, academia, or consumer protection groups.” Falling in the same family of thought is the fact that the national census is long overdue, the dated nature of the data on indebtedness (the All-India Debt & Investment Survey being done in 2019), and whether central and state governments will update data regularly.

“You have to see ULI in the context of the JAM trinity (Jan Dhan, Aadhar, mobile) and credit on UPI (especially the recurring mandate). Taken together you will get better visibility on borrowers," says Ritesh Jain, co-founder of Flexiloans.com.

All said, there’s no denying that we are on the cusp of something big – Mint (Road) fresh at that.

Figuring loans 
 

Data remains a big issue when mapping credit. While aggregate numbers tell you a lot, the granular aids perspective. A detailed study on financial inclusion will go a long way to get a better sense of what’s happening on the ground. The RBI’s Financial Inclusion Index is a single measure of overall financial inclusion. But the values of 97 parameters are not published. For 2022 and 2023, the values of three sub-indices are not shared. Originations refer to growth in sanctions of the amounts and number of loans involved.