FinTech‘Public Tech Platform for Frictionless Credit’ – A New Wave of Financial Inclusion in India

INTRODUCTION

The Reserve Bank of India (hereinafter RBI) has launched its pilot programme for propagating financial inclusion in the form of the release of a Public Tech Platform for Frictionless Credit (hereinafter the Platform) on August 17, 2023. Frictionless credit is a borrowing approach seeking to streamline the lending process and make it more easy access for a diverse range of potential borrowers, in contrast to the traditional systems wherein an individual has to go through extensive paperwork, tedious and long approval processes. Providing frictionless credit has been a longstanding goal in the banking policy in India as well as around the world. This respective platform is aiming to have an open architecture, open Application Programming Interfaces (APIs) to which all the players in the financial sector can come together and connect.

Presently creditors need to conduct hefty due diligence before the approval of a credit or a loan. This is despite the fact that in current times much of the data which is required for sanction of a loan or credit is already available online from a variety of bodies such as central government, state governments and banks etc.

To counter this problem the Reserve Bank Innovation Hub developed the Platform which has free architecture and is highly customisable to allow any and all banks to incorporate the Platform using a ‘plug and play’ model. The successful implementation of the programme seeks to eliminate the long hours and tedious procedure while make it easier for an individual to gain access to the credit as well as loans. It shall also significantly reduce the cost to the banks in conducting due diligence and allow cutting down on costs for customer acquisition.

IMPORTANCE IN DIGITAL LENDING

The term frictionless credit is general term used to describe an overall borrowing approach that seeks to streamline the lending process for consumers and minimise the regulatory and logistical procedures in lending. At its core, lending goes beyond mere financial transactions, it is an exercise to understand the borrower like their financial capacity, willingness to repay and overall financial responsibility and conduct.

The primary process includes Credit Appraisal which is a comprehensive evaluation of a borrower’s financial capacity, credit history (the score given to borrowers on the basis of their history of paying off past credit), and ability to repay the loan. As it is the key factor of assessing in loans.

The process of Credit Appraisal includes three main pillars which are:

• Adverse selection,
• Exposure Risk Management and
• Default Risk Management.

Adverse selection also known as anti-selection is a term used in economics and insurance to describe a market process in which buyers or sellers of service or a product are able to use their knowledge of the risk factors which are involved in the transaction to maximize their outcomes at the expense of the other parties to the transaction.

Exposure Risk Management includes assessing the potential impact of various risks on specific entity, investment, project or a portfolio while, the exact approach may be different depending on the context.

Default Risk Management, here means, the risk a creditor takes that a borrower will not make the required payments on debt obligation, such as a loan, a bond or even a simple credit card. Creditors and investors are exposed to default risk in virtually all forms of credit offerings.

DETERMINING FACTORS

To achieve functionality the Platform must first find a way to seamlessly collect all the data related to a person from the various State and Central Banks as well as other entities like Account Aggregators.

The Platform will be used to compile the relevant financial data from these all such key data sources and include the platform which integrates data from various sourced, credit information companies and digital identity authorities. This consolation helps in eliminating all the hindrances and streamline rule-based lending processes. Thus, the backbone of the entire Credit Appraisal process vide the Platform is data integration from the platforms that already exist such as Aadhar information, data from Account Aggregators

THE MERITS

The introduction of the Platform is not a novel initiative but another step in the larger initiative of the government to leverage widespread smart technology and cheap internet access to digitalise and proliferate financial services i.e. boost financial inclusion.

The Platform will help the poorest of the poor who, more often than not, rely on small local co-operative and community banks for financial support. The process of availing credit is especially important to be digitalised for the farming class of people.

However, the Platform is not solely directed to be a benefit for the poorer classes. Implementation of the Platform shall also help credit portfolio management. The consolidation of an investors entire credit and credit history data will enable improved credit risk assessment and will also enable efficient credit portfolio management.

In addition to the aforementioned, perhaps the biggest benefters of the Platform’s introduction will be the banks’ themselves. The reason behind this is that the Credit services of a bank have always been a more profitable service that bank offers however, a lot of that profit margin is sliced due to processes of due diligence and confirmations involved in the Credit Appraisal process is also a huge cost to the Banks. The platform will help not only consolidate already available information but it will also verify and confirm that the entire linked data set belongs to the same and right person.

AMLEGALS REMAKRS

The Platform has been a long pending initiative to ensure frictionless credit which will now be much easier and much more efficient than the tedious physical confirmations was which used in the traditional systems which will actually help the creditors and the loan takers.

Based on the learnings, the scope and the coverage would be expanded to include more products, information providers and lenders. It will facilitate a seamless flow of required digital information to lenders. It is similar to Google but for lending purposes. It also creates a bridge between the lenders and the borrowers that makes both their jobs easier and quicker. RBI has made a remarkable move to digitise credit delivery.

Team AMLEGALS assisted by – Ms. Mishri Patel (Intern)

For any query or feedback, please feel free to get in touch with tanmay.banthia@amlegals.com or mridusha.guha@amlegals.com