September 3, 2024
📰 FEATURE STORY
Will the Unified Lending Interface (ULI) be a game changer?
The Unified Payments Interface (UPI) has, by most accounts, been a game changer. Making payments has never been as easy as it is now, thanks to the government’s digital infrastructure push. It has been a pillar of the country’s economic growth. That push has expanded to records digitisation, identification, etc.
The next frontier is access to credit. The RBI will launch the Unified Lending Interface (ULI) to enable “frictionless credit”. The RBI hopes that by digitising access to a consumer’s financial and non-financial data, the ULI will cast a wide net across various sectors. Can it be revolutionary?
Context
The concept of ‘cash is king’ might no longer apply in India. Over a decade ago, cash ruled the roost. Now, not so much. The payments landscape has been revolutionised – apps, QR codes, and UPI have taken over.
The “Digital India” programme launched in 2015 was the catalyst in the growth of digital payments. Indian households contribute significantly to the continued strength of UPI and Buy Now Pay Later (BNPL). We’ve also got companies in this space, with platforms like GPay, PhonePe, etc. It has been successful in promoting a paperless and cashless environment in India for everything from groceries to travel.
The growth in digital payments wasn’t limited to apps plugged into the UPI ecosystem. Payment Cards, for example, have seen healthy growth, led mostly by credit cards. It’s perhaps fair to say that India isn’t necessarily a credit-forward society. But things are changing. The card payments market is projected to grow by 18% by 2026. But the payments ecosystem driven by customers isn’t the whole picture.
India’s aspiration to become self-reliant relies on the success of its micro, small, and medium enterprises (MSMEs). They’re about 90% of businesses and employ over 120 million people. One of the challenges that these businesses face is access to working capital. Some estimates have shown that only about 14% of MSMEs have regular access to credit.
Ahead of the Budget in July, representatives from MSMEs sought a digital push for, among other things, easy access to credit. It’s because the sector is often prone to cash flow fluctuations. Their demands are on solid ground. According to an Ernst&Young report, India’s MSME sector lags behind on formal credit penetration. The credit gap is about $530 billion.
The ULI hopes to be the thing to their rescue. Last August, the RBI launched a pilot for the ULI. It was billed as a public technology platform for seamless credit transactions. The goal was to streamline the lending process by decreasing expenses, accelerating the distribution of funds, and enhancing scalability.
According to RBI Governor Shaktikanta Das, the ULI will change the face of MSMEs and credit in India. He’s banking on the “new trinity” – Jan Dhan, UPI, and ULI – to be a revolutionary step forward in India’s digital infrastructure journey.
VIEW: A vital tool
For traditional banks, digitisation is driven by digitising credit proposal documents and automated data gathering. Digital lending has grown by leaps and bounds over the past decade in India, and it’s not expected to slow down, barring something catastrophic. The ULI will help in several ways for different sectors, particularly for agriculture and MSMEs. The pilot projects across five loan segments helped disburse over ₹5,500 crore in loans.
The RBI rightly realised that the data needed for credit appraisals was scattered across state governments, account aggregators, banks, and credit information companies. This became a hindrance in the timely delivery of loans. The ULI takes a ‘plug and play’ approach, enabling all financial sector entities to connect seamlessly. ULI is built on standardised Application Programming Interfaces (APIs), which can gather aggregate information from multiple sources.
With this tool, the time taken for credit appraisal, especially for small and rural borrowers, will be significantly lower. Since data sharing is standardised, ULI will boost the accessibility and efficiency of credit, particularly for underserved segments. For fintechs, it’s an opportunity to leverage streamlined data, spur innovation, and expand their reach. ULI is poised to take the same trajectory UPI went on in the payments landscape.
COUNTERVIEW: Not without its challenges
While the widespread adoption of digital lending platforms will likely spur a credit boom, it presents new challenges for lenders. Perhaps the biggest concern is loan recoveries. During economic downturns, cash flow disruptions are somewhat common for MSMEs, especially for small borrowers. As lending volumes increase, the likelihood of dealing with borrowers struggling to repay their loans will increase. Even more so if the credit process is overly streamlined without adequately assessing the risks.
There’s an important question about the ULI – should the RBI be involved in increasing credit penetration, particularly among the less served? Banking regulators are best known for enforcing procedures for banks while handing out loans. The ULI could become a catalyst or a processor of loans. What are the banks and Non-Banking Financial Corporations (NBFCs) doing then? It’s their job to build a repository to ensure that good customers aren’t denied credit access. Fintechs are already doing this.
It’s widely understood and accepted that many segments don’t have access to credit. So, why not have banks improve their processes on priority sector lending? Why not undertake financial inclusion through organic channels? On the cost front, who bears the burden of maintaining and upgrading the platform? One of the reasons why the UPI became popular is that users don’t bear the cost of transactions. Will banks absorb the cost of using the ULI? If so, will that be passed on to the borrower?
Reference Links:
- Reimagining how India’s MSMEs access credit – India Development Review
- RBI to launch Unified Lending Interface to plug credit gap in MSME, agri, and other sectors – The Financial Express
- After UPI, RBI announces new Unified Lending Interface: What is it? – Firstpost
- All you need to know about RBI’s Unified Lending Interface – The Economic Times
- RBI’s newest pitch Unified Lending Interface: How will it revolutionise credit availability – Business Today
- Vault Matters: Unified Lending Interface’s unanswered questions – Moneycontrol
What is your opinion on this?
(Only subscribers can participate in polls)
a) The Unified Lending Interface (ULI) will be a game changer.
b) The Unified Lending Interface (ULI) won’t be a game changer.
Previous poll’s results:
- The Unified Pension Scheme (UPS) is a good policy: 42.9%
- The Unified Pension Scheme (UPS) is a bad policy: 57.1% 🏆
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