What is RBI’s new pilot for frictionless credit?

Source: The post is based on the article “What is RBI’s new pilot for frictionless credit?”  published in The Hindu on 21st August 2023.

What is the News?

The Reserve Bank of India (RBI) has launched a pilot project in the form of a “Public Tech Platform for Frictionless Credit”.

The project seeks to give digital information to lenders to expedite access to credit or loans.

What is Frictionless credit?

Frictionless credit is a borrowing approach that seeks to streamline the lending process for consumers.

Unlike the traditional credit systems, where individuals need to go through extensive paperwork, credit checks and lengthy approval procedures, frictionless credit promises a smoother and faster experience.

Why Frictionless credit needed?

Before granting a loan, there’s a crucial process called credit appraisal. This process assesses the borrower’s ability to repay the loan and stick to the loan agreement. It’s especially important for banks because it affects their interest income and balance sheet.

RBI has noticed that the information needed for this process is scattered among different entities like governments, banks, credit agencies, and digital identity authorities. This separation creates hindrances in frictionless and timely delivery of rule-based lending.

To solve this, a new platform called “Public Tech Platform for Frictionless Credit” is being developed by Reserve Bank Innovation Hub, a wholly-owned subsidiary of RBI. This platform aims to make the lending process smooth and quick. 

As a step towards this, a pilot project for digitizing Kisan Credit Card (KCC) loans under ₹1.6 lakh was started in 2022.It tests a fully digital lending process without paperwork, even allowing loans to be given at people’s doorsteps.

What are the expected benefits of this platform?

Getting formal loans often involves multiple visits to the bank and lots of paperwork. This adds to the lender’s operational expenses, which can then be passed on to borrowers. According to an RBI survey, processing farm loans used to take two to four weeks and cost about 6% of the loan amount.

This platform will help in making this lending process smooth and quick. It will help in reducing costs, speed up the loan process, and make it scalable.