Sheetal, a 41 year-old widow, is a vegetable hawker and lives by herself in Mumbai. She wanted to expand her business by adding more stock and buying a new wheel-cart. She has a bank account, opened under the Prime Minister’s Jan Dhan Yojana. She could not avail credit from her bank for lack of any collateral or transaction history. Indeed, she is not aware of the importance of transacting regularly through her account. She has, however, been remitting money through a Suvidhaa agent (a small grocery store owner) to her mother for the education of her daughters, studying in her native village. The agent recently informed her of the possibility of availing loan from Suvidhaa (and Axis Bank) and she decided to avail it. The agent checked her eligibility and agreed to her request within an hour. She walked out of the store with the loan disbursed on her pre-paid card account. The next day, she withdrew about a half of the amount at a nearby ATM, to buy more vegetables to sell. She plans to buy a new cart soon, by withdrawing additional cash from the same account. Sadly, very few of the poor like Sheetal have an opportunity or the benefit of getting credit from banks to meet their personal or business needs.
As Nandan Nilekani puts it, “democratising credit”, to meet the needs of the productive sectors, as well as the marginalised and the poorer sections of the society, was amongst the original objectives of nationalising 14 banks in 1969. After 47 years, the reality is that traditional banks still only serve a small number of large borrowers, leading to what the economic survey for 2016-17 terms as “twin balance sheet problem”.
By providing relatively easy access to micro credit to over 28 million women clients, microfinance institutions play a vital role in partially democratising credit. Nevertheless, there is significant unfulfilled demand that is often met by informal sector moneylenders at exorbitant rates.
Meanwhile, Aadhaar has been enabling a silent revolution. To quote Nandan, “India has a unique opportunity to create a new and alternative credit infrastructure that can provide easy access to credit for millions of businesses and individuals, arising from the convergence of Aadhaar’s recent legislative legitimacy with regulatory innovation, technology and digitisation.”
In addition to Aadhaar, the India Stack is likely to transform payments, financial services and consumer protection in India. The India Stack has four layers. The foundation presence-less layer is Aadhaar and its extension in the form of JAM trinity (Jan Dhan will 213 million accounts, Aadhaar that reaches 97% of the adults; and mobile with over 1 billion registered users and over 300 million smartphones). The paperless layer will leverage digital identity (e.g. eKYC, eSignatures) and a repository for digital documents (DigiLocker) for storage, sharing and other purposes.
The cashless layer is a range of systems and platforms that can enable seamless and low cost digital transactions for all segments of population. Aadhaar-Enabled Payments System (AEPS), Aadhaar Payments Bridge (APB) System and Immediate Payment Service (IMPS) are already handling over a 100 million transactions a month, with value exceeding INR 200 billion (as of February 2016). The recently introduced Unified Payments Interface (UPI) aims at democratising payments and enabling interoperability across a wide range of payment instruments, not just bank accounts. Bharat Bill Payments Service (BBPS) will enable utility bill payments for the mass market. The consent layer is on the lines of the OpenPDS (open personal data store) developed by Massachusetts Institute of Technology. The consent layer will give people access to a store for all their personal data; and to which they can allow selective access to others. This will ensure data privacy, reduce consumer fraud, enhance consumer protection and allow users to build a repository of their digital footprints to enable financial service providers to make informed decisions on products for them.
Innovators and early adopter service providers are leveraging the building blocks of the India Stack that are already available, to deliver innovative financial products and services. Suvidhaa, a financial service provider for the mass market, in collaboration with Axis Bank, was amongst the first to adopt e-KYC and roll it out across its retail points. Building on this, Suvidhaa introduced another innovative product ‘Nano Credit’ for mass-market consumers and small businesses that regularly transact at Suvidhaa’s retail outlets. It is a term loan for a period of 18 months and with a ticket size of US$ 225. The interest rate charged is 22% per annum, with plans to lower it further. Nearly two-thirds of the borrowers so far have taken the loan for business purposes. The table below compares the typical ticket size, interest/fee rates charged and the common purpose for the loans.
Suvidhaa and Axis Bank are able to offer loan ticket sizes comparable to the microfinance sector, but at lower rates and with much quicker disbursement. Moreover, in the main, the loans are being availed of by customers who do not have access to credit from other sources, including from microfinance institutions. When benchmarked against global MFIs and the much lauded M-Shwari, the rates, ticket size, and processing time are (in the main) significantly better.
The factors that drive Suvidhaa’s superior offering are sophisticated, rapid credit scoring of applicants using a combination of a scoring algorithm with over 85 parameters (such as nature, frequency and ticket size of transactions; account balances; sending and receiving locations; sending agent coordinates) analysed from a financial transaction history of at least a year; e-KYC for customers; rapid appraisal by the bank team; credit bureau checks and digital disbursement through fully interoperable prepaid cards.
Going forward, Suvidhaa plans to leverage e-sign for customer consent and eliminate the process of authorisation with wet signatures. This will reduce the processing time by 15 minutes and enhance the convenience for clients even further. Efforts are underway to link directly with credit bureaus in India, which would allow Suvidhaa to then offer instant processing of loans for its customers.
In the three months of pilot to date, Suvidhaa has processed over a 1,000 loans and not one has arrears. All borrowers are called within two days of taking the loan to remind them of their obligations, that their loan is registered with credit bureaus and the implications of any default. Seven days before the monthly instalment is due, the system sends details of the amount due to the agent who originated the loan (and therefore receives commission on the basis of the borrower’s monthly repayment). This report encourages and helps agents remind customers that instalments will be automatically swept from their savings account, and thus it is important to ensure funds are available.
Suvidhaa and Axis bank are so pleased with the results of the pilot-test that they are already planning to scale-up the lending operations to 100,000 borrowers within a year, with a significantly larger roll-out, including into smaller towns and rural areas to follow thereafter. The overdraft variant, too, is all set to be launched and larger, business loans for the top 15% of Suvidhaa customers, who typically already have an e-KYC-enabled account. With 35 million customers, the majority of which have no other “digital footprint” beyond their transaction history with Suvidhaa, the organisation is well poised to leverage technology to democratise credit on a huge scale.
 People like Sheetal often do not have any digital footprints for lenders to be able to assess and evaluate the credit worthiness.