PwC's Financial RegTech Insights: August 2018

Need for innovation in the current banking scenario

India has a modest credit-to-GDP ratio that signifies poor penetration of the financial system in the Indian market. Therefore, the current focus is on initiatives that can help to gather and analyse credit data better. With a robust credit information management, we can include more of the informal sector under the formal financial system to achieve holistic financial inclusion.

On the other hand, even borrowers’ preferences are now shifting to formal credit from the earlier informal credit lending ecosystem. While the demand for these small ticket loans has been increasing, the response of traditional banks in tapping these customers is slow. In the existing system, banks end up spending more on background checks and loan initiation processes than what they earn through interest and charges.

There are ample opportunities in terms of launching need-based products that address specific financial demands of borrowers across terms such as the ticket size of the loan, tenure of the loan and customisation options across key features. Nano finance, micro investments, customised insurance packages and sachet-based financial services¹ are few such innovative products. Success of these innovative products require change in the mind-sets of providers from a push-based approach of offering specific products to a pull-based approach of meeting specific, context-based needs by modifying core product offerings.

Sachet-based financial offering is a concept to provide borrowers with access to any financial product anytime, anywhere and in any quantity, according to their specific requirement. The resulting outcome will be beneficial to borrowers, who will get access to cheap credit, as well as lenders, who will have alternate source of revenue.

PCR enabling objective credit decision making

Creation of PCR will result in an extensive database holding comprehensive information of borrowers in a single portal. PCR aims to fill these gaps due to unavailability of credit information and eradicate scenarios of adverse selection wherein low-risk borrowers are charged increased prices, while high-risk customers pay reduced prices on their loans.

The envisaged Indian PCR will mandate recording of all material events for all loans extended by all credit institutions such as commercial banks, cooperative banks, NBFCs, MFIs and from other sources and centralised credit information reporting. Relevant stakeholders will have access to information according to the allowed access level. This view is presented in the proposed information architecture on PCR.²

PCR high level information architecture

Stakeholders with access to PCR will be equipped with full information on the profile of the borrower, enabling them to take sound credit decisions at low cost.

PCR with full coverage of credit market information will result in benefits for the lender, borrower and regulator. The value additions provided by the PCR system is shown in the figure below and described in brief in the following section.

• Better fraud management and prevention
• Strengthening of NPA monitoring
• Increased credit availability for MSME segment
• Ease of credit access to small players
• Borrower information integrated across systems

Value additions from PCR System

PCR will strengthen the monitoring of credit exposure. It can help to develop and generate early warning signs to banks for any defaulting entity. If any defaulting entity seeks lending anywhere in the ecosystem, the timely dissemination of information will help avoid further lending to the borrower and reduce the likelihood of NPAs by value and volume. The reduction in NPAs will increase the availability of credit that can be lent out to the more deserving borrowers such as the micro, small and medium enterprise (MSME) and start-up entrepreneurs. Striving towards inclusive banking by increasing reach of credit to MSMEs has been one of the target objective to be achieved via PCR.

With PCR providing credit history and validated data for borrowers, more options will be available for smaller players with need of credit without any minimum threshold. Availability of reliable information on credit profile will help good borrowers distinguish themselves from the rest and have easy access to credit. Even borrowers without a previous credit history will have simple and fast access to formal credit without being stuck in long and stringent verification processes. This process will formalise credit lending and support financial inclusion.

GST accelerating expansion of financial services

GSTN has been the technology backbone for implementation of GST services. GSTN provides a platform where sellers upload their invoices that can be approved by the buyer. Therefore, in a way, GSTN has also become a trusted repository of matched invoices.

Following the GST roll out, it has been observed that small firms, who generally buy from large enterprise, are actively registering with GSTN to gain the incentive of input tax credit. As small and medium businesses are getting integrated with GSTN, we see formalisation and inclusion of the SME sector. As we progress, banks and lending institutions will be presented with a unique proposition to leverage technology infrastructure such as GSTN and PCR to calculate credit worthiness of SME players at a reduced cost.

• Credit information at low cost
  Traditionally, banks had to rely on a ‘feet on the ground’ approach to gather credit information. With GST roll out, this information is available online at a much reduced cost.
• Data-based lending
  Contrary to the traditional lending, which is asset or collateral based, lending institutions can leverage on consented data provided by GSTN users to assess credit worthiness based on credit payment history and can provide customised, small ticket, small tenor loans to SMEs.
• New business opportunity
  Historically, the SME sector has been deprived of funding from the mainstream financial sector. Informal lending has also been costly and limited. GST has provided an opportunity to banks and lending institutions to tap into this new target customer set comprising SMEs and expand its business operations.

Opportunities presented by GST

Banks are also providing GST filing services to its users that again provides credit information for both customers and its suppliers. As small businesses provide secure and verifiable details of transactions, lending institutions will get more authentic data on the health of SMEs.

PCR will create a unique identification of borrowers across databases and systems. A combination of PAN, Aadhaar, CIN and LEI could potentially be used as the unique identifier of entities, since most of the existing reports are based on either of these identification codes. Linkage can be established between other systems such as UIDAI, SEBI, GST systems, Govt. record, EPFO, CBDT, stock statements, NCLT and E-Court.

A holistic profile of the borrower can be built by pulling PCR information on attributes such as GSTIN and tax filed, date of filing of first tax return, date of last income tax filed, last annual gross income, legal and suits details, credit score, debt details, insurance premium payment arrears, utility bill payments arrears and debt and collateral details.

Therefore, when reliable data on transactions, derived from GSTN, is coupled with available credit information from other sources, lending ecosystem will be empowered with robust insights on credit worthiness across SMEs. This is expected to reduce the entry barrier for credit business in the SME segment and provide an opportunity to all lending players to develop a new market.