Shivanand Pandit
On August 26, 2024, Shaktikanta Das, the Governor of the Reserve Bank of India (RBI), announced the upcoming nationwide launch of the Unified Lending Interface (ULI).Modelled after the successful Unified Payments Interface (UPI), the ULI aims to streamline and expedite the process of obtaining credit, particularly for rural and small-scale borrowers. This initiative will benefit those involved in agriculture and micro, small, and medium enterprises, who often encounter significant delays and challenges in accessing financial support despite a strong demand for credit.
Governor Das noted that ULI is expected to transform the lending sector in India in a way similar to how UPI revolutionized payments. The platform, which was first tested in a pilot project launched in August 2023, seeks to improve efficiency by lowering costs, expediting disbursements, and enhancing scalability. The upcoming nationwide rollout will broaden access and significantly enhance the lending process.
Das believes that ULI will revolutionize India's lending landscape in the same way UPI transformed payments. He referred to the integration of JAM (Jan Dhan-Aadhaar-Mobile), UPI, and ULI as the “new trinity” that will drive India's digital infrastructure forward. The JAM initiative, which stands for Jan Dhan, Aadhaar, and Mobile, aims to link bank accounts, mobile numbers, and Aadhaar cards to reduce leakages in government subsidies.Launched in 2016, theUPI is an instant real-time payment system developed by the National Payments Corporation of India Limited (NPCIL). It enables users to transfer money seamlessly between multiple bank accounts in real-time. UPI has become NPCIL's most successful product and has expanded its reach to various countries, including France, Singapore, Abu Dhabi, Sri Lanka, Mauritius, Nepal, and Bhutan. Over the past three months, UPI transactions have consistently surpassed the ₹20 lakh crore mark, with July recording ₹20.64 lakh crore,June₹20.07 lakh crore, and May ₹20.44 lakh crore.
Many other platforms facilitatelending in India. They are, the Public Credit Registry (PCR) which is a central database that maintains comprehensive credit information about borrowers, enabling lenders to assess creditworthiness more accurately and reduce information asymmetry in the credit market. Account Aggregator (AA) Framework which is a consent-based, RBI-regulated platform that allows customers to securely share their financial information across institutions. This framework helps lenders access financial data more efficiently, leading to faster and better-informed lending decisions. Credit Information Companies (CICs) such as CIBIL, Equifax, and Experian collect and maintain credit data on individuals and businesses, providing valuable insights that aid lenders in evaluating credit risk. Trade Receivables Discounting System (TReDS) which is an electronic platform that facilitates MSMEs in auctioning their trade receivables at competitive rates, enhancing their access to finance. Peer-to-peer (P2P) Lending Platforms which are online platforms like Faircent and Lendbox enable individuals to lend and borrow money directly from each other, promoting more direct and personalized lending opportunities.
What is ULI?
The ULI is a digital platform designed to simplify the lending process by enhancing efficiency, reducing costs, accelerating disbursement, and increasing scalability. As India undergoes a rapid digital transformation, the adoption of digital public infrastructure is growing significantly. This shift has spurred financial institutions and technology companies to develop innovative solutions for payments, credit, and other financial services. However, despite the availability of data necessary for credit evaluation from various sources like government agencies, banks, credit bureaus, and identity verification authorities, this data is often fragmented and hard to access. This fragmentation creates obstacles in the efficient and timely delivery of credit, particularly in the context of rule-based lending.
The ULI addresses this challenge by enabling the smooth transfer of digital information, such as land records from various states, directly to lenders through a consent-based system. This approach will significantly reduce the time needed for credit evaluations, especially for smaller and rural borrowers. ULI's infrastructure is based on standardized APIs (Application Programming Interfaces), designed with a ‘plug and play' methodology to ensure easy digital access to information from various sources. This setup allows borrowers to experience swift credit delivery, with quicker processing times and minimal paperwork. The ‘plug and play' concept refers to pre-built facilities equipped with essential infrastructure like power and network connections, allowing businesses to begin operations immediately.
Challenges Ahead
The introduction of a ULI is crucial in India, especially considering the existing inefficiencies in credit delivery. These issues are particularly acute for MSMEs, which play a critical role in the country's economy. As the second-largest job creators in India, after the agriculture sector, MSMEs contribute significantly to the nation's economic output, accounting for about one-third of the Gross Domestic Product and 45% of national exports. Despite their importance, MSMEs face considerable challenges in accessing credit. In 2019, an Expert Committee on MSMEs, chaired by U.K. Sinha, former Chairman of the Securities and Exchange Board of India, estimated the credit gap in the sector to be between ₹20 to ₹25 trillion. This shortfall in credit availability poses a major obstacle to the growth and sustainability of MSMEs. More recent estimates indicate that this gap has expanded even further, now reaching approximately ₹28 trillion.To address these challenges, the government has implemented several measures aimed at improving credit access for MSMEs. These initiatives include granting priority sector lending status to MSME loans, which encourages banks to allocate a portion of their lending to this sector. Additionally, the Emergency Credit Line Guarantee Scheme was introduced to provide financial support to businesses during times of crisis, such as the economic downturn caused by the COVID-19 pandemic. While these measures have offered some relief, there remains a significant need for more streamlined and efficient credit delivery systems, such as the proposed ULI, to better support the growth and development of MSMEs in India.
However, it remains to be seen whether the ULI will fulfil the RBI governor's promise of being “a revolutionary step.” CareEdge Ratings has highlighted the major challenges MSMEs face in accessing formal credit, which include the requirement for collateral, the seasonal nature of their businesses, lack of awareness and financial literacy, and the absence of credit history and financial records. Apart from the issue of credit history, these challenges fall outside the scope of ULI. While accessing credit may become faster and easier, lenders could face significant recovery challenges, particularly during unexpected economic downturns. Small borrowers are often the first to experience cash flow disruptions when economic conditions begin to deteriorate.
In discussing ULI, Das has compared its potential impact to the transformative effect UPI has had on the payments ecosystem. However, there is a key difference. While ULI was developed to address the fragmented and cumbersome rules and paperwork surrounding payments, aiming to simplify and secure transfers by enabling multiple bank accounts on a single mobile platform for both individuals and businesses, ULI presents unique challenges. Specifically, ULI involves recovery risks that require financial institutions to implement much more robust recovery mechanisms to manage these risks effectively.
To stimulate private investment among small firms and enhance household consumption, India requires a more robust credit market. Over recent years, the demand for credit has consistently risen. For instance, between 2021 and 2022, approximately 66 million new customers were added to the new-to-credit (NTC) category, with 67% of these individuals hailing from rural and semi-urban regions. Despite this growing demand, access to credit for households and MSMEs in India remains limited. The disparity between the demand for credit and its availability is significant. Several factors contribute to this issue, such as many potential borrowers, particularly those in rural areas or operating small businesses, are considered high-risk due to their limited financial history or volatile income streams. This high-risk profile deters lenders from extending credit. Traditional methods of assessing credit risk often rely on comprehensive financial records, which many small and rural borrowers lack. This lack of data makes it challenging for lenders to accurately evaluate the creditworthiness of potential borrowers. Collateral requirements for securing loans can be a barrier, especially for individuals and small businesses in rural areas who may not have valuable assets to pledge against their loans. The costs associated with servicing smaller-value loans can be prohibitively high, particularly in rural regions. This discourages lenders from providing smaller loans that are needed for personal consumption and small-scale investments. The report published by Ernst & Young in 2023 highlighted the severe limitations in credit access in India. It found that credit penetration among MSMEs was just 14%, retail credit penetration was 11%, and credit card penetration was a mere 4%. These figures reflect the considerable gap between the demand for credit and its current availability, underscoring the need for a more inclusive and well-developed credit market to support economic growth and investment in the country.
The digital lending industry is set for remarkable expansion, with digital channels increasingly capturing a larger share of overall loan disbursements. However, this growth necessitates internal adjustments within the banking sector to fully leverage digital platforms. Notably, there is a significant gap between credit and deposit growth, with deposits lagging behind lending. To support sustained high credit growth and improve access to credit, banks must focus on increasing deposit mobilization. Additionally, the RBI must closely monitor and evaluate the lending practices of both banks and non-banking financial companies. Last year, the RBI responded to concerns about excessive loan growth by raising risk weightings for certain categories of loans to individuals.
To sum up, India's progress in financial digitalization continues to set global standards, with initiatives such as UPI and the emerging ULI leading the way. These innovations not only foster economic growth but also establish India as a significant player in the global fintech sector. However, the success of ULI remains uncertain. By improving credit access and optimizing banking services, India's approach has the potential to become a model for other emerging markets aiming to enhance financial inclusion and economic development. Policymakers should address the forthcoming challenges in implementing ULI and strive to develop robust solutions to ensure the new interface's efficiency and effectiveness.
The writer is a tax specialist, financial adviser, author, guest faculty and public speaker based in Goa. He can be reached at panditgoa@gmail.com or 9822983420
