What is RBI’s new pilot for frictionless credit?

General Studies Paper 3

Context

• On August 17, the RBI commenced a pilot programme endeavouring to evaluate the feasibility and functionality of the ‘Public Tech Platform for Frictionless Credit’. The suggested platform would strive to “enable delivery of frictionless credit by facilitating seamless flow of required digital information to lenders.”

The Platform

• Digital delivery of credit (delivering credit/loans though digital means) or any loan is preceded by a process of scrutiny known as credit appraisal.
• The process attempts to evaluate and accordingly predict the prospective borrowers’ ability for repayment of credit/loan and adhering to the credit agreement.
• This pre-disbursal process is particularly important for banks since it would in turn determine their interest income and impact on the balance sheet.
• The central banking regulator has observed that the data required for the process rests with different entities like central and state governments, account aggregators, banks, credit information companies, and digital identity authorities.
• This new platform would bring all of it together in a single place. To facilitate “frictionless” and “timely delivery” of loans, the central banking regulator had instituted a pilot project for the digitalisation of Kisan Credit Card (KCC) loans.
• It tested “end-to-end digitalisation of the lending process in a paperless and hassle-free manner”.
• The pilot is currently ongoing in select districts of Madhya Pradesh, Tamil Nadu, Karnataka, Uttar Pradesh and Maharashtra.
• It provides for “doorstep disbursement of loans in assisted or self-service mode without any paperwork.”

About new pilot

• The platform is premised around the learnings from all the ongoing programmes, and further expands the scope to all types of digital loans.
• The public platform will be developed by its wholly owned subsidiary, the Reserve Bank Innovation Hub (RBIH).
• The proposed end-to-end platform will have an open architecture, open Application Programming Interfaces (API) and standards, to which all financial sector players would be able to connect seamlessly in a ‘plug and play’ model.
• With the participation from certain banks, the platform would extend its focus also towards dairy loans, MSME loans (without collateral), personal loans and home loans.
• It is expected to link with services like Aadhar e-KYC, Aadhar e-signing, land records from onboarded State governments, satellite data, PAN validation, transliteration, account aggregation by account aggregators (AAs), milk pouring data from select dairy co-operatives, and house/property search data.
• Thus, it would cover all aspects of farming operations alongside those necessary for ascertaining financial profiles.
• Based on the learnings from this project, the scope and coverage would be further expanded to include more information providers and lenders.

Serving the purpose

• Experts, including the World Bank, point out that improved access to information provides the basis for fact-based and quick credit assessments.
• It ensures that credit is extended to a larger set of borrowers with good credit history.
• The borrowers too would benefit by the resulting lower cost of accessing capital, which would translate into productive investment spending.
• Availing formal credit may entail multiple visits to the bank alongside cumbersome documentation.
• This translates to higher operational costs for lenders which may also get distributed to borrowers.

Conclusion

• As per media reports, an RBI survey indicated that processing of farm loans used to take two to four weeks and cost about 6% of the loan’s total value. All in all, the lending platform would bring about “reduction of costs, quicker disbursement and scalability,” RBI noted.