Ease of lending: How Unified Lending Interface will improve credit access

Following a pilot project, the Reserve Bank of India (RBI) is preparing to launch a new nationwide Unified Lending Interface, or ULI, in due course. The platform seeks to enhance lending to various sectors of the economy, especially agriculture, and micro, small, and medium enterprises (MSMEs). Once implemented, it has the potential to transform the credit landscape in the country, akin to the Unified Payments Interface (UPI), which revolutionised digital payments. At the recently held RBI@90 Global Conference on “Digital Public Infrastructure and Emerging Technologies”, RBI Governor Shaktikanta Das highlighted the ULI platform would facilitate a seamless and consent-based flow of digital information from multiple data service providers to lenders. Notably, the ULI architecture will ensure digital access to information from diverse sources, enabling lenders to get accurate information about the creditworthiness of potential borrowers.

It is also expected to cut the time for loan approval and disbursement. Seamless delivery of credit and a quicker turnaround time without requiring extensive documentation will benefit both borrowers and lenders. In an attempt to improve the quality of governance, India has made excellent use of its digital public infrastructure (DPI), including the JAM (Jan Dhan accounts, Aadhaar, and mobile phones) trinity and UPI. ULI is set to become the latest addition to India’s DPI journey. In order to ramp up private investment by small firms and boost household consumption, India needs a well-developed credit market. Demand for credit has risen consistently over the years. In 2021 and 2022 combined, for instance, around 66 million customers were added to the new-to-credit (NTC) category, and 67 per cent of them were from rural and semi-urban areas. Yet, credit availability to households and MSMEs in the country remains constrained.

There continues to be a significant gap in the demand and supply of credit, which can be attributed to various factors such as the high-risk profile of borrowers, insufficient traditional data for risk assessment, lack of collateral, and high costs of service, particularly for those in rural areas who require smaller-value loans for personal consumption. A report released by EY last year showed that MSME credit penetration, retail credit penetration, and credit card penetration in India stood at a measly 14 per cent, 11 per cent, and 4 per cent, respectively. In this regard, ULI will give lenders access to the customer’s financial and non-financial data all in one place, thereby facilitating lending through digital modes. Instead of relying solely on traditional credit scores and income statements, lenders will get access to additional data and advanced algorithms to assess risk. For instance, physical-asset ownership, land records, geolocation tagging, and digital-footprint tracking can signal the creditworthiness of a prospective borrower.

Overall, the digital lending industry is poised for impressive growth, with loan disbursement via digital channels continuing to garner a higher share of overall disbursement. But, at the same time, internal adjustment is required within the banking system to take advantage of the platform. For instance, there is a wide gap between credit and deposit growth in the banking system with deposit growth trailing lending growth for some time. Clearly, banks need to mobilise higher deposits if they have to sustain high credit growth and ease of access to credit in the domestic economy. Further, the RBI will also need to carefully monitor and study the lending practices of banks and non-banking financial companies. Last year, it increased risk weightings for lending in certain categories to individuals to contain loan growth.