Despite being a $2.9tn economy1, a large part of India’s 1.3 billion-strong2 population remains one of the most underserved in terms of financial services. The loan underwriting process is fraught with challenges, and finance products have failed to capture the bulk of previously unimagined demand in their current avatar. We’re talking about those without an explicit credit report, such as street vendors, truck drivers, factory workers and small business owners.
BCG predicts that India’s digital lending market will potentially reach a trillion dollars by 20233. While digital transformation will be a key driver of this massive growth, the concept of Public Credit Registry (PCR) and a digital data aggregator has unlocked doors to make this growth truly financially inclusive with the introduction of sachet loans. The future looks exciting – businesses in this emerging industry should think outside the box to capture the need for small business loans in novel ways, with cutting-edge, cost-effective technological solutions.
Reimagining the lending landscape
The lending process today is fragmented, consisting of multiple sources of uncertainty and delay -- both to lender and borrower. Moreover, lending in India remains largely asset-based, which excludes a significant chunk of the population from credit-accessibility. Adding to this is the agricultural sector of the economy, where money moves in seasonal cycles rather than on a monthly basis.
The Reserve Bank of India has taken two major steps in the last couple of years that enable financial institutions to rethink the lending equation and ideate products that capture demand from smaller situations rather than milestones such as car and home purchases. The first move was the introduction of PCR, and the second is the birth of OCEN or the Open Credit Enablement Network.
PCR will bring near real-time visibility into all lender-borrower interactions across the nation at any point in time through data aggregators. On the other hand, OCEN4 aims to augment the lending process with technology, a framework, and partnerships, which will enable lending service providers (LSPs) to speak to borrowers in a unified language. By leveraging data acquired through a data-blind intermediary institution5 that allows seamless access to borrowers’ information (with their consent), financial institutions can make the shift to cash-flow based lending.
The nano-credit industry is also a major opportunity from the lender’s perspective. In Indian Banks: A time to Reform?6, Viral Acharya and Raghuram Rajan point out that unlike regular-sized loans, default rates on these products tend to be lower. Yet, most Indians with low, non-fixed income resort to informal loans with exorbitant interest rates: they are invisible to conventional LSPs, where eligibility criteria are a roadblock. By tapping into PCR, OCEN, and technologies such as IoT, AI, and blockchain, lenders can bring the one-rupee shampoo sachet revolution to the credit industry7, to rewrite the trajectory of the nano-credit sector.
Implications and roadmaps: A hundred-rupee loan for the chaiwala?
While these new developments will help cater to a new segment of borrowers, delivering the right products will be a challenge for LSPs. Sachet loans, for example, can capture the financial realities of these economically and technologically primitive borrowers only when delivered through the right channels at the right time. Consider disbursing a small business loan to a taxi driver who has run out of fuel to power his business through the week - or for an unexpected repair, or to cover the deductible amount on his insurance policy.
To turn such scenarios into points of sale, LSPs must ideate products with the right digital capabilities, including novel means of risk assessment with deep learning models, taking in a variety of customer data to create risk profiles. Consider the refuelling scenario: an LSP can use historical IoT data from the driver’s car instead of an address verification document and capture a continuous data footprint from various sources beyond traditional credit reports and bank statements.
For this reason, strong partnerships with fintech companies and technology players will help LSPs to fast-track such products to borrowers through cost-efficient, safe and scalable mechanisms. These products will be driven by data at all stages - from marketing to underwriting, to risk assessment and disbursement. A comprehensive worldview in terms of the credit business data life-cycle will also minimize the cost of introducing such nano-credit products to the market8.
While sachet loans represent a single product category, lending companies must come up with original value propositions targeting the right contexts rather than a customer base modelled solely on financial needs. A thousand-rupee loan will be needed by a car owner in a very different context than a street-food seller -- this must be reflected at every point of product-ideation and the sales journey. A lower market entry barrier9 also implies room for new entrants with targeted product offerings. As the country inches towards the Finance 4.010 paradigm, LSPs can become champions of this inclusive growth.
1. Investopedia, "The Top 25 Economies in the World," December 2020, https://www.investopedia.com/insights/worlds-top-economies/#:~:text=India%20Nominal%20GDP%3A%20%242.94%20trillion,the%20United%20Kingdom%20and%20France
2. World Bank, "Population, total - India," accessed at https://data.worldbank.org/indicator/SP.POP.TOTL?locations=IN
3. The Boston Consulting Group, "Digital Lending," July 2018, https://image-src.bcg.com/Images/BCG-Digital-Lending-Report_tcm9-197622.pdf
4. Financial Express, "What does OCEN mean for small businesses?" September 2020, https://www.financialexpress.com/money/what-does-ocen-mean-for-small-businesses/2071398/
5. Sahamati, "OCEN & Account Aggregators will change digital lending in India," August 2020, https://sahamati.org.in/blog/ocen-account-aggregators-will-change-digital-lending-in-india/
6. NBER, Indian Banks: A Time to Reform," September 2020, http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/pdfs/indian-banks-reform.pdf
7. Deccan Herald, "Banks can learn from shampoo sachet revolution of 1970s: Viral Acharya," July 2020, https://www.deccanherald.com/business/business-news/banks-can-learn-from-shampoo-sachet-revolution-of-1970s-viral-acharya-867298.html
8. Sahamati, "OCEN & Account Aggregators will change digital lending in India," August 2020, https://sahamati.org.in/blog/ocen-account-aggregators-will-change-digital-lending-in-india/
9. Moneycontrol, "A Rs 500 loan for the paan wala? RBI says this registry will enable sachet-sized loans," August 2020, https://www.moneycontrol.com/news/business/economy/a-rs-500-loan-for-the-paan-wala-rbi-says-this-registry-will-enable-sachet-sized-loans-2863781.html
10. EY, "Finance 4.0: The changing role of finance in the new economy", June 2017, https://www.ey.com/en_us/podcasts/better-finance-podcast-series/2017/06/season-1-episode-1-finance-4-the-changing-role-of-finance-in-the-new-economy
*Not all references are directly linked - some arguments have been qualitatively synthesised based on information in these sources.