Opinion: Towards frictionless credit
Processing of farm loans takes three to four weeks and the cost incurred is about 6% of the loan amount sanctioned
By Dr Seela Subba Rao
The Reserve Bank of India (RBI)’s composite financial inclusion index (FI-Index), which measures the extent of financial inclusion nationwide, increased across all matrices and reached 56.4 in March 2022. The index is responsive to ease of financial access, availability and usage of services and quality of services consisting of 97 indicators. The index ranges between 0 and 100 — 0 means complete financial exclusion and 100 is complete financial inclusion.
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In certain States such as Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh and Northeast, this index remains below 50, indicating poor banking facilities even after seven decades of Independence. Even if banking facilities are available, the process of sanctioning loans is time-consuming and a bunch of documents is required.
Keeping this in view, the RBI, in association with the Reserve Bank Innovation Hub, started a pilot project — Public Tech Platform — in September 2022 for frictionless credit delivery through an end-to-end digital process, starting with Kisan Credit Card (KCC) loans. The pilot for KCC loans is currently operational in select districts of Madhya Pradesh, Tamil Nadu, Karnataka, Uttar Pradesh and Maharashtra. Recently, dairy loans and unsecured MSME loans have also been included. Based on the learning of the pilot project of the Public Tech Platform, the scope and coverage would be expanded to include more products, information providers and lenders.
How Platform Works
The platform is intended to serve as a one-stop digital clearing house for credit-related information, which should help accelerate the loan approval as well as disbursal process significantly. It will have an open architecture, open Application Programming Interfaces (APIs) and standards to which all banks can connect in a ‘plug and play’ model. It makes the process seamless by providing all required information in one place to facilitate credit.
The process rests on mainly three factors — adverse selection of borrowers, exposure risk measurement and default risk assessment. Adverse selection can be tackled by the information asymmetry between borrowers and lenders. Exposure risk measurement deals with the total loan outstanding permissible per borrower from various lenders at any point in time. The default risk assessment evaluates the borrower’s ability to repay the loan and the credit score.
The new device would integrate data from central and State governments, account governments, account aggregators, credit information companies and digital identity authorities. The platform also encompasses digital loans beyond the KCC, including MSME loans without collateral, personal loans and home loans. It will link with various services like Aadhaar e-KYC, Aadhaar e-signing, land records, satellite data, PAN, validation transliteration and account aggregation by account aggregators etc.
The Benefits
The platform’s data consolidation would enable improved credit risk assessment and efficient credit portfolio management. It also addresses operational challenges such as multiple visits by borrowers to bank branches and documentation requirements leading to cost reduction for both lenders and borrowers. Several surveys revealed that the processing of farm loans takes three to four weeks and the cost incurred is about 6% of the loan amount sanctioned. Thus, the platform streamlines the process to quicker loan disbursement and scalability resulting in a more efficient credit eco-system.
Since it facilitates financial access to all segments of society, including low-income individuals and marginalised groups, empowerment takes place reducing income disparities and fostering more equitable economic growth. Access to credit also enables aspiring entrepreneurs to start and expand businesses. This leads to increased job creation, innovation and economic diversification. In agrarian economies, access to formal credit sources can enable farmers to invest in modern agricultural practices leading to productivity and rural development.
In July, the RBI set up a stall at the venue of the third meeting of G20 finance ministers and central bank governors to showcase this initiative. An experience centre was put up to exhibit the transformational digital KCC and digital dairy loan. The digital KCC highlighted how digitalised land record data can be used to sanction and disburse loans in a few minutes liberating farmers from the need to visit bank branches physically. It was completely paperless and digitalised. The process included account opening through e-KYC, accessing digitalised land records, credit bureau scores and other critical inputs. Similarly, the digital dairy loans leveraged the digitalised milk collection/pouring data available with milk cooperative societies. The process of loan sanction to disbursement is end-to-end digitalised.
Plugging Gaps
The need for such a centralised public platform can hardly be over-emphasised when one considers the lack of formal credit penetration, particularly among small and marginal farmers in the rural hinterland. The question of what needs to be done to make institutional rural credit more inclusive continues to remain a vexing challenge to government planners, bankers, researchers and other stakeholders. Recent survey reports reveal that barely 20% of the 12.56 crore small and marginal farmers have access to institutional credit. As a result, a large majority of rural borrowers end up availing loans from informal sources, including moneylenders.
There is also a need for setting up credit bureaus in the country. By building individuals’ and businesses’ reputations as collaterals, using payment history and predictive analytics, these agencies can play a vital role in expanding financial services to the unserved and underserved population in the country. Financial institutions in collaboration with credit bureaus can play an instrumental role in strengthening financial mechanisms and increasing the level of financial literacy in rural India.
A word of caution for the banks financing the MSME sector is necessary at this juncture. The strong growth in MSME loans (unsecured) book can pose a problem to banks as gross NPAs of MSME loans rose by Rs 20,000 crore to Rs 1,65,732 crore as of September 2021 as against September 2020. Aspects such as repaying capacity, proper utilisation of loans and other basic parameters are to be followed minutely while sanctioning and disbursing loans to eligible borrowers even through the Public Tech Platform.
The digital platform, if successfully implemented, can help redress precisely this challenge to the delivery of formal credit by helping leverage the contemporary advances in digitisation of information and ensuring that small-ticket loans are made available in a timely and cost-effective manner.
