Frictionless credit initiative slashes operational costs for lenders

The pilot has been extended to four more states — Maharashtra, Uttar Pradesh, Karnataka, Gujarat (for dairy farmers) from August 17 this year

The frictionless credit initiative being piloted by the Reserve Bank is helping lenders slash their customer acquisition cost by a whopping 70 per cent, while for borrowers the saving is 6 per cent of the loan amount, a senior central bank official has said.

The pilot started with an all-digital KCC (kisan credit card) lending, developed by the RBI Innovation Hub on the public tech platform, in Tamil Nadu and Madhya Pradesh this April.

The pilot has been extended to four more states — Maharashtra, Uttar Pradesh, Karnataka, Gujarat (for dairy farmers) from August 17 this year.

The pilot launch of the public tech platform for frictionless credit to farmers has helped reduce operational costs for lenders by more than 70 per cent, while for the farmer, the saving is 6 per cent of the loan amount, Ajay Kumar Choudhary, an executive director and head of the fintech department at the RBI, said here over the weekend while addressing the three-day global fintech festival.

Moreover, there is massive savings in opportunity cost, as earlier a farmer had to make six to eight weekly rounds to the bank which has come down to a maximum of 0 minutes now, Choudhary said.

Choudhary further said this has also reduced traditional charges that banks used to levy from borrowers, as with all documents available digitally, there is effectively no cost in customer acquisition with this model of lending.

The platform was created by the Reserve Bank Innovation Hub, an independent subsidiary of the central bank, enabling seamless flow of necessary information to lenders. This in turn will help in disbursing frictionless credit.

On April 17, the RBI rolled out a pilot project for pure retail products such as kisan credit card loans up to Rs 1.6 lakh per borrower, dairy loans, un-collateralised MSME loans, personal loans, and home loans, in Madhya Pradesh and Tamil Nadu.

The platform is an open architecture, based on open application programming interfaces (APIs) and standards platform where all financial sector players can connect seamlessly in a plug and play model.

It’s akin to a Google search for retail lending as the platform just collates data (Aadhaar e-KYC, Aadhaar e-signing, account aggregation by account aggregators and PAN validation, to sanction and disburse loans as part of KYC verification.

“The frictionless credit platform is intended to be rolled out as a pilot project in a calibrated fashion on August 17, both in terms of access to information providers and use cases. It shall bring about efficiency in the RBI lending process in terms of reduction of costs, quicker disbursement, and scalability,” the RBI said in a public release on August 15.

“During the pilot, the platform will focus on products such as KCC loans up to Rs 1.6 lakh per borrower, dairy loans, MSME loans (without collateral), personal loans and home loans through participating banks,” the apex bank said.

Based on the learnings, the scope and coverage will be expanded to include more products, information providers and lenders during the pilot, the RBI release said.