The Reserve Bank of India (RBI) has announced a pilot programme for ‘Public Tech Platform for Frictionless Credit’.It is a digital platform created by RBI’s subsidiary Reserve Bank Innovation Hub (RBIH) which will enable seamless flow of necessary information to lenders and thereby help in disbursing frictionless credit. Frictionless credit is a borrowing approach that seeks to streamline the lending process for consumers. Unlike the traditional credit systems, where individuals need to go through extensive paperwork, credit checks, and lengthy approval procedures, frictionless credit promises a smoother and faster experience. The initiative comes as part of RBI’s developmental and regulatory policies and was introduced following the Monetary Policy Committee (MPC) meeting in August 2023.The whole process here rest on three pillars :
- Adverse selection (information asymmetry between borrowers and lenders)
- Exposure risk measurement
- Default risk assessment.
- It is an end-to-end digital platform that will have an open architecture, open Application Programming Interfaces (APIs), and standards to which all banks can connect in a “Plug and Play” Model.
- The platform would integrate data from central and state governments,Account Aggregators (AA), banks, credit information companies, and digital identity authorities. This consolidation would eliminate hindrances and streamline rule-based lending processes.
- The platform’s scope encompasses loan to diversified sectors which includes Kisan Credit Card loans of up to ₹1.6 lakh per borrower, loans to dairy farmers, credit-sans-collateral to MSMEs, and personal and home loans through participating banks.
- The platform will work on data integration meaning It will link with various services like Aadhaar e-KYC, land records from on boarded state governments (Madhya Pradesh, Tamil Nadu, Karnataka, Uttar Pradesh, and Maharashtra), Satellite data, PAN Validation, Transliteration, Aadhaar e-signing, account aggregation by account aggregators (AAs), milk pouring data from select dairy co-operatives, house/property search data etc
- The platform itself is NOT a lending or credit issuing facility. It will only collate or compile data from various agencies and present it to lenders operating through the platform.
Advantages of the Platform
- Simplification–It simplifies the integration of vital financial data through open Application Program Interface(API).
- Scalability– It ensures that credit or other financial instruments are extended to a larger set of borrowers with good credit history. World Bank pointed out that improved access to information provides the basis for fact-based and quick credit assessments.
- Productive investment– The borrowers would benefit by the resulting lower cost of accessing capital, which would translate into productive investment spending.
- Cost effective– This platform reduces the multiple visits to bank to avail formal credit and costs associated with it.The simplified process is expected to make credit transactions smoother and faster. RBI survey indicated that processing of farm loans took 2 to 4 weeks and costs about 6% of the loan’s total value.
- Improves Efficiency–It centralizes potential borrowers information on a unified platform streamlines processes.
- Seamless– The participation of banks, NBFCs, fintech firms, and start-ups in this platform aligns with the dedication to seamless credit and payment solutions.
- Foster innovation– The ‘plug and play’ model encourages innovation, driving the lending sector towards greater accessibility, cost reduction and efficiency.
- Improved Credit Risk Management – The platform serves as a foundation for more advanced credit risk assessment and comprehensive credit portfolio management. By leveraging better quality information, lenders can make data-driven credit evaluations more efficient. This leads to more informed decisions regarding the risk associated with lending to specific borrowers.
- Improves credit accessibility– It can leverage the contemporary advances in digitisation of information and ensures that small-ticket loans are made available in a timely and cost-effective manner. In 2021, NABARD economist observed that ‘even among well-developed regions, only a fifth of the more than 12.5 crore small and marginal farmers have access to institutional credit.
This platform will promote multiple players, including banks, non-banking financial companies (NBFCs), FinTech businesses, and startups, to work together to develop and provide solutions in the areas of payments, credit, and other financial service.So we see that the “Public Tech Platform for Frictionless Credit” is designed to usher in a more inclusive, efficient, and technologically-driven era for credit lending in India. By combining enhanced risk assessment with streamlined processes, the platform aims to benefit both borrowers and lenders, ultimately fostering economic growth and financial stability.
The platform will surely help in significantly reducing the turnaround time, which would lead to better operational efficiency.