What Is RBI’s Pilot Programme For Facilitating ‘Frictionless’ And ‘Timely’ Credit?

Relevance: GS3 - Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment, Inclusive growth and issues arising from it GS2 - Government policies and interventions for development in various sectors and issues arising out of their design and implementation, Statutory, regulatory and various quasi-judicial bodies.

(Source: The Hindu, 08/18/2023)

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Why in the news?

• Recently, the RBI initiated a pilot programme to evaluate the feasibility of the Public Tech Platform for Frictionless Credit.
• The platform was announced by the RBI at the Monetary Policy Committee meeting of August 2023.
• It aims to streamline the credit delivery process by reducing costs, quicker disbursement, and scalability.

What is the Public Tech Platform for Frictionless Credit?

• The Public Tech Platform for Frictionless Credit is a platform developed by the Reserve Bank Innovation Hub (RBIH), a subsidiary of the Reserve Bank of India.
• It was launched as a pilot project on August 17th, 2023.
• The pilot phase will focus on credit products such as the Kisan Credit Card loans, dairy loans, collateral-free MSME loans, personal loans, and home loans.
• According to a survey conducted by the RBI, the processing of farm loans took two to four weeks and cost about 6% of the loan’s total value.

What is the platform for?

Pre-disbursal

• The digital delivery of credit is preceded by a process of scrutiny known as credit appraisal.
• This involves attempts to predict and evaluate the borrower's ability to repay the credit and adhere to the credit agreement.
• The process consists of three pillars:
• The problem of adverse selection: This is due to the asymmetry of information from either the borrower or lender
• Measurement of exposure risk
• Assessment of default risk i.e. the probability that the borrower may default in repayment.
• This process allows the financial institution to determine the potential interest it could earn and the possible impact on its balance sheet.

Integration

• The data required for the credit appraisal process is held by separate and distinct entities such as the Union and state governments, account aggregators, banks, credit information companies, and digital identity authorities.
• As a result, rule-based lending becomes complicated and delayed.
• The new platform developed by the RBI aims to correct this by bringing all data together in a single place.

What do we know about how the pilot works?

Features

• The platform is based on the learnings from all existing programmes of the RBI and includes all types of digital loans under its scope.
• Open architecture: The platform has an open architecture model which fosters interoperability and collaboration among the various entities of the financial sector.
• Plug and Play model: It has open Application Programming Interfaces (APIs) and standards that enable seamless integration and interaction among participating entities through the Plug and Play model.

Implementation

• As the platform is gradually expanded and the number of participant banks increases gradually, the platform will extend to different credit facilities such as dairy loans, collateral-less MSME loans, personal loans, and home loans.
• Services that will be integrated with the platform include:
  • State governments: Aadhar e-KYC, Aadhar e-signing, land records]
  • Account aggregators: Satellite data, PAN validation, transliteration, account aggregation
  • Other data include milk pouring data from select dairy co-operatives and house/property search data.
• It will cover all aspects of farming operations, help understand the exposure and default risk for loans, and evaluate financial profiles.
• It will be implemented in a calibrated fashion with lessons learned from the pilot project used to expand the scope and coverage of the project to include more products, information providers, and lenders.

What purpose does it serve?

• Credit management: It will help provide improved credit risk and overall credit portfolio management.
• Access to information: It will increase access to information.
  • According to the World Bank, this will enable quick and factual credit-based assessments.
• Extension of borrower base: It ensures that credit and other financial instruments are extended to a wider range of borrowers with good credit history.
• Productive investment: It will help reduce the cost of borrowing.
  • As a result, productive investment spending i.e. the money spent to purchase capital goods for the production of capital, and final goods and services will increase.
• Cheaper and simplified borrowing: Borrowing generally involves multiple bank visits and providing up-to-date information.
  • The resultant increases in costs would be distributed to borrowers, thereby raising the cost of borrowing.
  • The integrated platform will enable easier, quicker, and cheaper borrowing.

To know more about digital lending, click the link.

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FAQs

MCQs

Question: What is the purpose of setting up of Small Finance Banks (SFBs) in India?

1. To supply credit to small business units
2. To supply credit to small and marginal farmers
3. To encourage young entrepreneurs to set up businesses, particularly in rural areas.

Which of the above statements is/are correct? (UPSC CSE 2017)

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

Question: What is/are the purpose/purposes of the 'Marginal Cost of Funds based Lending Rate (MCLR)' announced by RBI?

1. These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances.
2. These guidelines help ensure the availability of bank credit at interest rates that are fair to the borrowers as well as the banks.

Which of the above statements is/are correct? (UPSC CSE 2016)

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither I nor 2

Question: In the context of the Indian economy, non-financial debt includes which of the following?

1. Housing loans owed by households
2. Amounts outstanding on credit cards
3. Treasury bills

Select the correct answer using the code given below. (UPSC CSE 2020)

(a) 1 only

(b) 1 and 2 only

(c) 3 only

(d) 1, 2 and 3