Farms are launchpads for frictionless fintech
India's fintech, led by UPI, is expanding into agriculture with a new lending platform, ULI, aimed at improving credit access for farmers and small firms.
India’s financial technologies, such as the UPI or Unified Payments System, which have made the country a global front runner, are first put to test not in complex money markets but in the relatively modest farm sector and small cash-starved firms, according to the RBI (Reserve Bank of India).
The first clients often aren’t CEOs but farmers. This bottom-up strategy has meant that agriculture has been a springboard for financial technologies. It has not only quickened adoption – two-thirds of Indians are rural residents – but also ensured that frictionless finance is devised keeping the large informal sector in mind, the central bank says.
The leapfrogging success of the scan-and-pay or buy platforms -- also known as digital public infrastructure or DPI because the government lays out the core technology – is now being sought to be replicated in lending. India’s UPI platform is currently available in seven countries.
The Reserve Bank Innovation Hub (RBIH), a wholly owned subsidiary of the central bank, is getting ready to roll out a UPI-like lending platform, called the Unified Lending System (ULI). It was piloted largely in agriculture and dairy sectors in 12 states involving 16 banks and carried out in collaboration with Amul, the country biggest cooperative-based milk brand.
As in the case of UPI, lenders using the ULI will be able to offer credit on a plug-and-play-basis, which will expand availability of formal credit. “Our digital payments ecosystem has been developed as a free public good,” PM Narendra Modi had told a finance ministers’ conference in 2023.
The RBI is now also piloting a customisable Central Bank Digital Currency (CBDC), or e-rupee, which can be programmed such that even landless farmers, who can’t get farm loans because they don’t possess land records, can access formal credit.
The CBDC is an electronic form of the rupee and distinct from crypto currency. While both use blockchain technologies, CBDCs are sovereign-backed and regulated, with the same value as a physical fiat currency. Cryptos are privately created stores of value, outside regulatory oversight and even pose security and economic risks, according to analysts.
The CBDC trials for both wholesale and retail segments have been ongoing since 2022. In the retail segment, it currently has five million users involving 16 banks.
Many countries now have digital currencies to cut transaction costs and make settlements efficient. The RBI is going further.
At a recent fintech conference, Governor Das ruled out any haste in rolling it out on a system-wide basis but said India’s CBDC would greatly benefit the underprivileged due to its “programmability” feature.
“Tenant farmers often struggle to access agricultural credit as they do not have the land title to submit to banks or lending institutions. The end use of the CBDC can be programmed to provide inputs or raw materials for agriculture i.e. it can be programmed to provide loans for fertilizer, milch animals or to provide a subsidy,” he said.
The programming is being done in such a way that the lender can verify the tenant and purpose of the loan, he added.
The ULI platform, which is closer to a universal launch, digitises a customer’s financial and non-financial data that usually exists in silos. It will cater to financing needs of particularly cultivators and micro, small and medium enterprises, which account for 35.4% of manufacturing and 45.7% of merchandise exports, official data show.
“As you know, the government has taken the initiative to ensure that India has the world’s best DPI. Our mission at the RBIH is to see how we can leverage the digital technologies of today to ensure frictionless finance to a billion Indians,” said Rajesh Bansal, the CEO of the Reserve Bank Innovation Hub.
In the pilot phase launched in August 2023, the ULI focused on products like Kisan Credit Card loans, dairy loans, MSME loans, aside from personal and home loans in Madhya Pradesh, Tamil Nadu, Karnataka, Uttar Pradesh and Maharashtra. Loans were successfully given out to particularly dairy farmers based on milk-pouring data, which served as indicators of value of earnings.
“The programme has to also have seamless features for risk assessment and credit profile of clients or else lenders could end up lending to a lot of non-prime borrowers,” said Ashish Kaundalya, the CEO of QuickCash, a lending platform.