New-age Technologies that have changed the face of Lending in India

Work has not remained the same in this fast-changing world of technological advancements. This is true not only for IT companies but also for almost all industries – manufacturing and services alike. Lending, especially in NBFCs has also seen a lot of innovations which has changed the way it was accustomed to operating. Some of the new-age technologies that have changed the face of lending in India will be discussed in this article.

To start with e-KYC, this Aadhaar-Card unique way to identify your customers via mobile, biometric, face, or eye scan has changed the way the banks have been confirming anyone’s identity in India, that too for a population of over 1.4 bn – this is unparalleled in the world. Know Your Customer (KYC) is a prime requirement of regulators around the world to know the identity of a person the entity is dealing with. This has made everyone’s life quite simple in India and saves huge costs and paper, while the authentication can be done in a matter of seconds. Of late, this facility has been extended to NBFCs in India as well, post a regulator/government approval process.

Once the customers have been identified, then the lending process requires you to check their financial credentials so that the limit up to which the loan can be advanced to such customers can be assessed. Earlier, it used to take days and months together as it was all paper-based which apart from being time-consuming was also laced with the risk of fraudulent documents. The innovation which took care of the same is Account Aggregator. An Account Aggregator (AA) is a type of RBI-regulated entity (with an NBFC-AA license) that helps an individual securely and digitally access and share information from one financial institution they have an account with, to any other regulated financial institution in the AA network. Data cannot be shared without the consent of the individual. The AA is an “interoperable” “data blind” consent manager, meaning that it can be shared across various platforms and AA cannot see the data being shared.

As already explained above, India’s financial system involves many hassles for borrowers today like sharing physically signed and scanned copies of bank statements, tax returns, etc. running around to notarise or stamp documents, or having to share your username and password to give your financial history to a third party. The Account Aggregator network aims to replace all these with a simple, mobile-based, simple, and safe digital data access & sharing process. AA cannot see the data; they merely take it from one financial institution to another based on an individual’s direction and consent. Contrary to the name, they cannot ‘aggregate’ your data. AAs are not like technology companies which aggregate your data and create detailed profiles of you. The data AAs share is encrypted by the sender and can be decrypted only by the recipient. The end-to-end encryption and use of technology like the ‘digital signature’ makes the process much more secure than sharing paper documents.

Once the documents are checked, the next process in the lending tree is the authentication and disbursal where the innovation is equally amazing – the OCEN.

Open Credit Enablement Network (OCEN, pronounced O-ken) is a set of open standards to facilitate the various aspects of the lending value chain. It creates a common language for collaboration and partnerships between lenders and digital platforms, called lending service providers (LSPs) in OCEN parlance. OCEN has evolved as the common language, a credit protocol infrastructure. It is a strictly defined spec of APIs that acts as a standardizing middle layer between lenders and digital platforms. It has various segments such as, (i) LOS: Loan application API/Loan offer API/Loan acceptance API, (ii) Consent Request: consent API (to connect with AA)/consent for monitoring API, and (iii) Loan Disbursal: Grant loan API
The next innovation that has already made waves worldwide is UPI, the Unified Payment Interface. We have all witnessed how successful it has been, and now we are also seeing its extension, the UPI Collect. Not only can UPI be used to transfer funds from one account to another but it can also be used by borrowers to make payments to a lender on an online platform. The cycle is explained below:

  • The service will send a collect request to the borrower who chooses to make a payment using his/her UPI;
  • This UPI Collect request shall be sent to the borrower on the registered virtual payment address for which the borrower shall also receive a mobile notification, inferring him that a UPI Collect request has been sent to him/her;
  • Once the request is accepted, the payment shall be complete.

In this way, UPI Collect eliminates the need to use any extra codes or digits to complete the transaction, making it quite convenient for both parties. The interface of UPI Collect is also very easy to understand and use, making it an indispensable mode of transacting for the collection of money. The best part about UPI Collect is that it makes it possible for a transaction to be completed in a few seconds or a minute at most.

I can conclude by stating that extending micro to small loans to entities can now happen end-to-end in an electronic platform with minimum risk of fraudulent documents and ghost entities, all while ensuring accurate credit assessment, disbursement, and even collection. It offers huge opportunities to not just the lenders but also the micro and small enterprises which, so far have been deprived of formal loans due to a plethora of risks, which with such innovative technological interventions, are now getting adequately addressed.

Authored by: Anirudh Singh G. Thakur, Company Secretary and Chief Compliance Officer, Arohan Financial Services Limited.