In the internet era, the "Kickstarter snag" is massive - the chasm between a killer product idea and the brutal reality of bringing it to market…
Kickstarter, the American crowdfunding platform, sees dreamers drum up hype for their vision, only to face the challenges of design, engineering, and production. Stats scream the struggle: a whopping 75% of tech dreams on Kickstarter blow past their deadlines.
But innovative products are what move the world forward and this week we wanted to look at one of the toughest “vision-to-reality” tests for the Fintech industry (in India and globally)...Can the secured loan journey finally become completely digital?
Lending is inherently complex…
In almost every market, enormous advancement has been made over the last decade in the digitalisation of the unsecured consumer loan journey. Before developments such as e-KYC, open banking and credit databases, loan applications were dogged by a paper trail - with multiple documents required from the consumer and multiple human interventions needed to process and create a loan.
In India Aadhaar, Account Aggregator, e-Nach and various other digital verification APIs have completely streamlined this process. The digitalisation of consumer onboarding has seen such rapid acceleration that it has led to an almost 4-fold increase in personal loan disbursement over the last 5 years.
However, the pace of digitalisation of secured loans has notably lagged far behind. Unlike the streamlined process of verifying individuals and assessing their financial standing in unsecured personal loans, secured lending poses a dual challenge: both the borrower and the collateral must undergo thorough scrutiny. This complexity arises because much of the collateral involved is physical rather than digital, which means meticulous examination such as verifying property existence and assessing the borrower's legal ownership.
But the problem is ripe to be solved - thanks to recent RBI capital norms combined with concerns over unsecured consumer loan leverage, we are seeing much greater focus from lenders on unsecured loan books - and it seems likely fintechs will assist in closing the gap.
Take a look at this infographic by elevation capital - the home loans market is almost completely untouched by Fintech players today - will that change in the next decade?
One simple way to think about the challenge - is that in unsecured personal loans - only the “person” needs to be verified and analysed. For example “Is this person who they say they are?” “Is this loan affordable?”. Whereas in secured lending, both the borrower and the collateral need to undergo extensive analysis. By definition, much collateral itself is physical and not digital making the analysis inherently cumbersome - i.e. “does this property exist? “What is the customers’ legal claim to this property?”
It is interesting to note that in the area of digital “assets” - secured lending flows are moving fast to digital. Several startups and established players such as Smallcase, Mirae and even Bajaj, have begun to offer secured loans against mutual funds (“LAMF”) - authenticating the ownership and then lien-marking the funds, during the loan application, in a completely digital and seamless manner.
So Data is the challenge…
The loan against mutual funds example stands out because the data repositories that hold verification information - for example Mutual Fund Transfer Agents such as CAMS - have created digital APIs, making their data easily accessible on a real-time basis. This is simply not true for more complex assets.
In the case of loans against property (“LAP”) - consumer or SME - land registry records would need to be completely digitally accessible…whilst some states have begun to make this possible, many have not and independent (manual) valuations of property would still be needed in many cases.
Digital Public Infrastructure to the Rescue?
There may be some potential to use centralised databases to solve these challenges. The Indian government's ambitious Public Credit Registry, still under development, aspires to be the ultimate source of truth for lenders - however currently it plans to hold only comprehensive financial information on businesses (not necessarily information on their assets).
Integrating this with the Trade Receivables Discounting System (“TReDS”) - which serves as a digital hub where MSMEs can sell their trade receivables - with GST e-invoicing - could help borrowers automatically upload approved invoices, boosting transparency and data accuracy.
The property ownership issue is also being addressed. Currently, each state has its portal, making it difficult for lenders to verify if a business property is owned or rented. Digitising land records and creating a nationwide window can solve this issue and could potentially enable Straight-Through-Processing (STP) for lenders.
Combining these solutions with regular reporting to the Central Repository of Information on Large Credits (CRILC) has the potential to make collateralised lending - at least to SMEs - a lot faster and simpler.
Securing the digital guardrails
And by this, I mean being API-first. Systems that can talk to each other.
Loans against investments present a huge opportunity in India. While digital frameworks for assets like mutual funds and shares are in place, some hurdles remain.
For instance, lenders need accessible APIs from entities like the Central Depositories Services India Ltd. (CDSL) and National Securities Depository Ltd. (NSDL). Progress is evident, with CDSL already offering APIs for share pledging. Collaborations like Registrar and Transfer Agents (RTA) CAMS and KFintech in the mutual funds industry show promising steps towards addressing this gap.
Yet to be solved is Loan against Insurance - where no centralised database of premium or policy ownership exists or is being planned.
Similarly, integrating GST data into the Account Aggregator framework would enhance efficiency, while establishing a central repository for financial documents could expedite submissions for MSMEs
In conclusion..
India's digital infrastructure, anchored by initiatives like Aadhar and UPI, has catalysed a fintech revolution, particularly benefiting sectors like MSMEs. Leveraging AI/ML and alternative data, collaboration between banks and fintechs has begun to facilitate formal lending to previously underserved segments, transforming the lending landscape - on the unsecured side. Secured lending is now ripe for similar disruption and potentially has more incentives for investment given the lower risk and higher ROE often achieved in collateralised lending,
With collaborative efforts, including tech advancements and regulatory support, the journey towards digital lending for secured loans has a promising future with continued innovation and cooperation.
What do you think will really unlock secured lending for a market like India? Who is doing a great job in this space…Tell us in the comments section!
