Digital transactions being done through the unified payment interface (UPI) and Bharat Interface for Money (BHIM) could eventually lead to increased lending at the bottom of the pyramid.
Digital payments think tank iSPIRT, which worked with the government to develop these payment platforms, says that the digital footprint created as a result of the transactions can be used to assess credit-worthiness of potential borrowers. The idea is similar to models being used by a number of fintech firms, which analyse day-to-day transactions of customers and try and assess their ability and willingness to repay loans based on that information.
Sharad Sharma, one of the co-founders of iSPIRT, says that a digital footprint can be created through the use of UPI and BHIM. This, in turn, can allow lenders to assess potential borrowers. Sharma spoke to BloombergQuint on the sidelines of a fintech conference hosted by the Digital Lenders Association of India on Wednesday. Delivering his speech at the conference, Sharma said that iSPIRT is working on such a cash-flow based lending model to help boost the availability of funds to potential borrowers. According to Sharma, Rs 80,000 crore in additional lending could be facilitated through such a lending model.
We think this is achievable, that is the number we are working towards..Literally, over the weekend you can build a loan management system because all the key elements are there.
Sharad Sharma, Co-Founder, iSPIRT
The big opportunity, according to Sharma, lies in what has come to be known as the India Stack – the backend infrastructure that has been built to link digital records, cashless payment transactions and the e-KYC process.
The government is hoping to get 100 million users on the payment platforms by the end of this year. This entire base of users can become potential borrowers once their cash flow patterns are available, according to Sharma. The process gets easier as customers start to use Aadhaar based e-KYC which allows users to be identified without any paper work.
The cash flow based approach to lending can change things since a customer’s income can be estimated from their business patterns, said Sharma while adding that this will reduce the dependence on collateral against loans.
iSPIRT has already started moving in this direction.
The latest version of the BHIM app, launched on April 14, carried an update which allows consumers to download their transaction history. Based on this, a pilot lending project will be initiated in four cities starting with Chandigarh. The pilot project will then be extended to Jaipur, Vizag, and Unjha Mandi in Gujarat.
The shopkeepers in these cities will be asked to push their customers to pay online which will build a digital footprint, that lenders can use to provide credit. However, the loans given out will be very short term and can’t be for longer than a week.
This is not the first attempt to provide access to credit for those without a formal credit history. A number of fintech firms are using social media and phone data to assess people’s ability and willingness to pay.
Among these companies is Credit Vidya which collects up to 10,000 data points from a customer to build a credit profile which can be used alongside or in place of traditional credit bureau data for making lending decisions.
“If I am not paying my phone bills or internet bills on time, then obviously there’s a red-flag there about the customer’s behaviour towards paying his dues. If my cheques are also bouncing, then it says something about my intent,” Rajiv Raj, co-founder of CreditVidya told BloombergQuint in January this year while explaining the business model.
Before a similar model can be built using UPI transactions, a ‘consent layer’ will need to be added to the payment platform. Such a consent framework would take permission from a customer to share information with a potential lender.
Once this is done, lenders will have additional information to go by, said P.K. Khaitan, managing director of NeoGrowth, a company which lends to small businesses in the country.
“We have found alternate credit scoring methods to be very resilient and reliable as evidenced by our lending based on our surrogate credit score cards. The iSPIRT trial could open doors for a lot of consumer lenders to provide credit to customers they would earlier not take up because of the lack of data so we are definitely stepping into a new paradigm where credit access becomes easier,” Khaitan told BloombergQuint.