Future of Banking in India: Data-Driven Lending
Banking Systems & Infrastructure in India
The Indian banking industry has come a long way since the nationalization of banks in 1969, and traditional banks have been the backbone of the country’s financial system. Despite the rise of Fintech in recent years, banking remains a dominant force in India.
However, the emergence of Fintech has brought about significant changes in traditional banking systems. Visionaries have observed the challenges banks face, trying to adapt to the latest technologies and streamlining their banking operations with the new age evolving Fintech.
Limited access, lack of customer-friendly banking experiences, inefficient management practices, and infrastructural barriers are some significant limitations observed, particularly in rural and remote areas of the country.
Legacy practices, such as paper-based lending, are time-consuming and can be intimidating for customers who may not have all the necessary paperwork readily available.
The lack of transparency and the cumbersome application process deter potential borrowers from seeking loans via banks and authorized entities.
Rural India now has access to smartphones and digital banking services, but they are not tech-savvy to understand banking terminologies and leverage those digital services using smartphones.
Hence, many banks implemented kiosks for ease of customers in remote areas. Despite the efforts of the government and banks to increase financial inclusion, many people still do not have access to essential banking services.
Trends were observed wherein owners of small business entities sought loans at marketplaces with higher interest rates.
As these owners were new to credit without a substantial credit history, banks were reluctant to offer them credit within the existing infrastructure. Banking facilities also face the challenge of data and security, which can seriously affect customer data and trust.
There is a gap between promise and performance; banks must embrace digital transformation and prioritize the customer experience to stay relevant and competitive.
Also, comply with regulations such as RBI guidelines for outsourcing IT vendors and customer data regulations from a regulatory and compliance view while leveraging technology to streamline the overall banking experience for their customers.
Fintech Journey in India: Birth of India stack and its impact on BFSI
The uncovered gap in traditional banking systems enabled the emergence of Fintech in India. India is undergoing a digital transformation, with the government’s “Digital India” initiative leading the way in driving economic growth.
One key aspect of this transformation is the India Stack framework, a set of open APIs that facilitate the development of digital services using India’s extensive digital public infrastructure (DPI).
DPIs are interoperable, open, and inclusive systems supported by technology and provide essential, society-wide, public, and private services that play a critical role in accelerating this digital transformation inclusively.
The India Stack framework has three primary layers, each with unique features and benefits. The Identity Layer is a unique digital biometric identity with open API access, including the Aadhaar card and Mobile Aadhaar, owned by the Unique Identification Authority of India.
The Payments Layer is an electronic interoperable payment network owned by the National Payments Corporation of India, which includes IMPS, AEPS, APB, and UPI. The Data Layer is a modern privacy data-sharing framework with an open personal data store owned by the Reserve Bank of India.
Finally, at a core level, the driving vision of India Stack is of Open Networks to establish a level playing field for members of a digital ecosystem, which includes OCEN- India’s Open Credit Enablement Network and ONDC – Open Network for Digital Commerce.
The India Stack framework has brought about significant changes in the payments landscape, with the introduction of the Unified Payments Interface (UPI) revolutionizing digital payments in India, making them accessible to millions without bank accounts or credit cards.
Additionally, the Open Credit Enablement Network (OCEN) has revolutionized the lending industry by providing lenders with real-time access to credit information, enabling faster and more efficient lending processes.
Open Network for Digital Commerce (ONDC) is transforming the way e-commerce functions by enabling e-commerce through an open protocol based on open-source specifications.
Account Aggregator is another crucial component of the India Stack framework, allowing individuals to share their financial data securely with multiple financial institutions.
With this, India stack has emerged as a game-changer in India’s BFSI (Banking, Financial Services, and Insurance) segment. It enables financial institutions to offer digital services such as paperless account opening, e-KYC, digital signatures, e-stamping, and secure document storage.
The framework also allows financial institutions to leverage consented customer data to gain insights and develop hyper-personalized products and services. Furthermore, it can potentially increase financial inclusion by providing digital services accessible to all, including those in remote and underserved areas.
It has transformed how people interact with technology, creating a vast ecosystem of digital services that have opened new opportunities for businesses, entrepreneurs, and individuals.
The BFSI segment in India is evolving at an unprecedented pace, and financial institutions need to adapt new strategies to remain competitive and meet the changing needs of their customers.
Account Aggregator: Rise of Data-driven lending in India
With the rise of digital lending, open banking, and data analytics, Indian banks are embracing new technologies to remain competitive.
One of the most significant changes Indian banks must adapt to is the shift towards flow-based lending based on consent. Banks, NBFC-D, RRBs (RBI), AMC, CRA, Depositories (SEBI), IRDAI, PFRDA, GSTN, PPFO, and EPFO have already been onboarded as Financial Information Providers (FIPs) on Account Aggregator. It is already in a discussion that CBDT is expected to be part of the AA framework sooner.
Onboarded FIPs shall use data analytics to make more informed lending decisions and rely on customers to share their consent for their data. It is a significant shift from traditional lending models, which relied heavily on credit scores and historic data measures.
To take full advantage of these new data-driven lending models, banks in India also focus more on analytics as a key player in their decision-making processes.
Therefore, embracing technology, particularly Artificial Intelligence, Machine Learning, and Deep Learning-trained models, can aid in comprehending vast data volumes. This trend is increasingly prevalent in the BFSI sector, facilitating system and infrastructure updates.
As part of this shift towards data-driven lending, Indian banks must revise their credit policies. Instead of relying on existing policies, often based on more traditional measures like credit scores, past loan default history, and other financial indicators like investments and assets, banks should adopt data-driven credit policies to enhance credit assessment.
For a borrower seeking a business loan, data points such as month-on-month sales, geographic sales distribution, product-wise sales summary, top suppliers and buyers, and more can help them build a complete picture of a borrower’s creditworthiness.
Moreover, banks can look at broader data points, including social media activity, online shopping habits, and lifestyle measures as additional measures.
Alongside policy changes, amending the underwriting rules will be equivalently important, with more emphasis on data analytics and less reliance on traditional measures.
Banks must rethink their underwriting model instead of summarising thousands of rules in their rule book and updating them with high-end flow-based data points to generate loan approval.
Regulatory bodies often lay out new regulations to ensure evolution doesn’t come at the cost of consumer protection. These regulations cover many potential issues, like data security and consumer privacy.
Potential issues like data security and consumer privacy need to be addressed with these emerging models of India stack; hence, the government has introduced the Data Protection and Data Privacy(DPDP) Bill.
Banks struggle to meet regulatory compliance is another major challenge for traditional banks in India. Banks must comply with a complex and constantly evolving regulatory landscape, which requires significant investments in compliance processes and systems. Compliance failures can result in hefty penalties, impacting the profitability and reputation of banks.
Government & Industry building fintech ecosystem in India.
The relationship between the Indian government and industries has recently undergone a significant transformation.
Traditionally, the government’s policies determined the direction of the industries, and they were expected to follow suit. However, we are now witnessing a new era where the government and industries are jointly building frameworks for development.
Through this partnership, innovative solutions have been developed that enhance operational efficiency and tackle societal issues like financial inclusion and healthcare.
An illustrative instance is the India Stack, which showcases the effectiveness of public-private collaboration. In the banking, financial services, and insurance (BFSI) sector, the India Stack has brought about a revolutionary change in service delivery.
With over a billion individuals having access to various digital services, such as banking, insurance, and investment, it has facilitated seamless interactions between businesses, governments, and individuals, resulting in faster, more convenient, and cost-effective transactions.
This partnership has increased access to financial services, improved financial literacy, and enhanced market competition.
Additionally, it has paved the way for new business models, such as neo-banking, mobile wallets, contactless payments, alternate credit scoring, BNPL, BBPS, supply chain financing, crypto-trading, robo-advisory, RegTech, and Insurtech solutions.
The collaboration between the government and industries in the BFSI segment has created an ecosystem that fosters innovation, growth, and sustainability. As a result, the sector is poised for continued success and advancement.
The banking sector in India is undergoing a significant transformation as it embraces new technologies and new data-driven lending models.
From data flow-based lending to a greater focus on analytics and from revised credit policies to changes in underwriting model rules, banks in India must adapt quickly to remain competitive in an increasingly digital landscape.
