Panellists:
Sajish Pillai, MD & Head (Assets & Strategic Alliances), Consumer Banking Group
GPJ Gupta, President (Head of Business Solution Groups), Kotak Mahindra Bank
Sony A, Senior GM and CIO, South Indian Bank
Rahul Solanki, UPI Product Manager, NPCI
Rama Krishna Raju, Director and Chief Executive Officer, Pennant Technologies
Moderator:
Shashank Shekhar, Co-founder & Head of Consulting, The Digital Fifth
(For viewing the webinar recording, please click here: https://www.pennanttech.com/webinar/opting-for-the-right-technology-strategy/ )
Shashank Shekhar
Good afternoon, everyone. Thank you for joining us to this knowledge session by The Digital Fifth. This is not our standard knowledge session. It’s a mix of the knowledge session and the panel discussion on one of the hot topics in today’s time on the UPI credit line.
So, without taking much of the time, I think we already have the audience in room and we have a time crunch also because we have a session and then a panel discussion with the panelists.
So, let’s get started.
The people will be joining during the process. So let me just share my screen and then get started with the discussions. Thank you again for joining in.
And, also I welcome the panellists who are there in the session.
Last time guys, we had taken a session on the credit line of the UPI, primarily, from the product and business perspective. What are the different dynamics and what kind of the business model we expect to evolve? This time, we are going to focus on how we build it out about, especially on the backend of the tech side of it because there’s lots of discussions going at the banks.
What kind of the optionality needs to be picked up? What is good, what is bad, short term, long term? Those are the various aspects. And that’s why we have the panellists from the banks who’d undertake to guide us through the whole of the process. We may not get the answer to every question. We’ll try to touch up on the peripheral aspects.
This session is organised in partnership with Pennant Technologies, who are a leading lending platform company in India. So we have Rama Krishna Raju from Pennant in the session and once we get into it, we’ll go through the formal discussions.
So let’s get started. Let’s touch upon the various topics we’ll look at.
Are there any different product variants which can be built? Yes.
But, what are those? We’ll look into that.
What kind of the tech architecture which will require to enable that business involvement on the credit?
And what are the factors that you need to pick it up when you’re trying to pick up the right solutions.
So, we’ll touch upon it and then immediately move into the panel discussion.
Before we get started, maybe just quick, 1 to 2 minute Raju, I’ll invite you to talk about Pennant and then, we’ll get started.
Rama Krishna Raju
Hi, thank you all for joining us today. We, Pennant work in lending as one of our core platforms, with many large NBFCS within the country and one or two large banks as well within the banking ecosystem of India. So, we are a 17 year old company, based out of Hyderabad, having customers predominantly across in various cities of India.
Shashank, please go to the next slide.
So, we power three out of six of the largest Home Finance companies (HFCs), including the large names. And then we also work with you know, companies in terms of the end-to-end lending offering that includes the loan origination, loan management and collections. That’s been our strength.
And then we now see UPI coming onto the credit part of it. We see that there’s a good amount of chance for Pennant to work with banks at this point in time. And, maybe in the future if RBI allows for NBFCs. We are exploring partnerships with the banks. In terms of putting up Pennant as a platform, we also got an OD product within a built in offering. That’s what something we wanted to use for UPI on a credit line.
So that’s about us. Let’s move on.
Shashank Shekhar
Thanks, Raju.
So, just a quick introduction. I’m Shashank Shekhar and I will moderate the session today.
I’m part of Digital Fifth, We are Asia’s first Fintech and Digital Consulting Advisory Firm. We work with the banks, Fintechs and NBFCs and Tech companies. So that’s about us.
So let’s get started with the topic straight, right? We’ll get into the various aspects of the tech and then engage with the panellists to get different insights including NPCI and the banks.
Firstly, what are the product propositions, when it was launched? Definitely, it’s trying to make the funds available through digital. And how it can be disbursed faster. But more importantly, like how we see the different possibilities. Is it that one single product on the credit line or not?
And, that’s where that you will have to start looking at, what are the backend configuration to do on that. So, primarily, it could be different unsecured retail products, it could be for the business product also, right? They can be taking care of the working capital requirements like buying an inventory, small level of the inventory for the small merchant at regular intervals.
And, it could be very simple for the individuals also or BNPL kind of a structure that customers always keep on looking that as a kind of the alternative to the BNPL, it could be the fast formal credit or the fast credit, right? I will not have the fund available but can I just take it on the UPI credit line?
These are the different possibilities I would say, but banks will start looking into that. Once these are unsecured, it could be a possibility that things start moving forward in the secured probably when you start looking for the higher limit as the things move forward, right?
Can it be the gold backed credit line with a higher limit? And it could be for both business as well as the retail, and securities etc. So these are the different possibilities we are just putting in the point which can be the future.
And if you start looking at the product positioning for using definitely is fine and it’s will create its own niche space between that combination of personal and cards, right? Where that premise leads has best out of all the things and it’s an ease of use, how this is evolved and it creates its own space in the entire individuals financing space, right?
Okay, so don’t get bogged down with such complex blocks and all these things. What we are trying to put it that it’s not going to be easy in the backend. We feel that it’s just one product configuration.
But there are multiple. I think one of the critical elements is the UPI switch which typically resides in the backend, right? On the top of that, you will have the system of interaction where your own mobile banking is facilitating the transactions, right? But for the PSP side and the payment gateway side also.
So that’s one, the customer interaction part of it and then CRM, right. Because for the CRM, you have to initiate the entire the linkage between the AE card of the lead which gets generated and the LOS definitely is a critical component. How do you underwrite that? How do you facilitate the onboarding?
You can’t have the manual intervention kind of mechanism to onboard the customer and enable the credit line. And that’s where that whole objective is to promote this product. Definitely that will be probably enhancing that adoption, but more critical component will come on the LMS like how you’re going manage this line? How do you manage the revolving nature of the customer taking that credit and utilising it, right? And then on top of the thing, how you take care of the API management, the charging interest calculations, and repayments?
These are all the components that will start coming and we’ll talk about some of the elements at a later stage. And then also you will require to build the laws of the rule-engine, right? Because there could be since as it’s a mix of payments and the lending.
Facilitation is on the payment, but the backend is the kind of the credit line very similar to the credit card, isn’t it?
How do you do the early warning system, the data analytics? You may be doing a lot of configuration as we’re talking about in the backend and create variants of the product. So how do you design that variant?
So that’s there and definitely on the collection because this is again the most critical part which is going be there while LMS, you need to manage the entire underlying credit line but how you’re going to do the collection part of it, right?
And don’t worry, this deck will be available to you. I’m just trying to optimise our time right now.
Look at some of these elements like BREs is now definitely how you’re going to underwrite that customer and it could be a possibility that banks will be looking into that gradual upgrade of the credit line for the customer.
So that’s also where the BRE will start playing a role, right? Because you need to look at that what kind of the data is collected from the PSPs your backend, utilisations, the repayment patterns, all the different aspects and then you need to read put on the real logic every time of the customer data, right?
The CRM’s definite objective will be to have a complete fulfillment as soon as the customer applies through the credit line on the PSP platforms or the bank’s own platforms, right?
You don’t want to have a mechanism like ‘apply now’ and then take the leads. But there would be possibility that that it generates the lead journeys and get broken up in between that. How are you going to take care of the entire leads which get generated in this whole process from the PSP or the bank systems or whatever the other interfaces are there?
And it could lead to the high volume because one of the things that everybody is expecting that it’s very similar to the UPI the way of the payment side has happened in terms of its velocity, in terms of the volume, the similar kind of things will happen eventually into the UPI credit line also.
So the entire lead generation mechanism going to take care of it.
It’s the same on the Loan Origination System LOS. As I was talking about that, like most of the times you will try to focus 90% on the end-to-end fulfillment, to get like as soon as customer applies for the credit line, is he able to get the credit line within seconds, within few minutes? So, backend in the LOS, it’ll also have the integration with BRE to take care of that things
So that’s where the Loan Origination System(LOS) and then all the different aspects that need to be taken care in terms of the pricing, in terms of the detailing, and all these things are present. And then LMS for sure.
Because that it’s all about managing the credit line on the backend that how much money that customer has used in, what is the lien period for the no-interest charge? How the interest will be charged? How the repayment would be scheduled? How much amount has he used, reinstatement of the limits?
These are the different aspects that we need to start considering, right? So, that’s where it becomes very critical and lots of data will also be generated from the LMS which we need to have the linkage with the BRE again.
Those are the data that you need to send back on the BRE across all the utilisation, the repayment patterns which can be used to maybe enhance the limits, right? So that’s where the LMS and the switch is probably that interface.
Because all the PSP interfaces will be directly with the switch. So how the switch will talk to your LOS and LMS in the backend is very critical because that’s when that you need to build entire seamless journeys.
And it’s one additional hop. It’ll be like the current UPI structure where the UPI switch is there, which again in the back and talk to the core banking system it could be either talking to the core banking system or it could be talking to your elements or the LOS, right?
So that’s a switch and some of these are like very critical for any lending. But now look at some of the elements which will come into the picture, which will also require to have a kind of the tech stack which integrated to all of the frame like entire revenue distributions. Because in this is a revenue making product, where MDR, interest charges and all the different components will come into the picture that how you can do revenue distribution.
So you need to have the kind of mechanism built into the backend, it could be Loan Management System (LMS) or it could be outside of the LMS probably that’s when we’ll come to Raju. Next are NPA management, reconciliations etc.
Rewards are not added here, but the laws of the reward mechanism need to be built in the process.
So how the rewards point will get generated, get consumed, and more importantly, how are you going to manage the entire refunds?
Because for example, customer has bought some things and if he returns that stuff, how the credit line gets reinstated, if its consumed in certain things, he’d buy something and part refund has been done, part consumption has happened.
So, how are you going to manage those things?
So, those are the complications we require to include into the picture. You need to be very careful about that, picking up the tech stack and designing the tech stack to support that.
Currently the market is exploring multiple options. I’ll just talk about that. There are two options – one is definitely LMS that I’ve been talking about, but an alternate option is being looked at. Can we use the existing credit card management system or not? Or the existing core banking system?
And we’re just chatting about the likes of, why do you need a credit line? Because you have an alternate mechanism to make a payment but its existing CBS is not available.
Your savings account is anyway not available. And at the same time, your deadline also is unavailable. Now coming back to the credit card management system as an option, because it’s a way of the revolving nature you consume, pay back, utilise your limit until the time your limit has not been exactly utilised, you can continue to use it, right?
The time to market, definitely could be a little lower because, you need to figure it out that there is no credit card or card number attached to it. But it’s going to still operate in a very simple nature.
So, if you get the process, you can definitely move it pretty fast, manage the entire credit line life cycles. Quicker GTM, right?
But cons could be that it still requires an OPEX. You need to put in a high cost of customisation because it may not allow as I was talking about different product variations. In the earlier slide, you will not able to design some of these product variants and many of the platforms, maybe the legacy platforms.
The challenges could be that the systems are designed to handle those kind of the volumes and velocity because typically in the credit card transactions, you don’t see that kind of scale and volume, right? That typically being seen on the UPI side.
Are the systems designed to handle What kind of velocity?
While, loan management system? Definitely you can have that dedicated loan management, create BRE, omnichannel for multi-product configuration. That’s another major advantage that it brings on the table because definitely implementation and integration with the existing CRM and all the things could be a challenge, which may slightly delay your product launch and all these things.
So that’s where we go. And the last is definitely, if you want to go to the LMS, right? I think LMS could be a good proposition to build a long term business around, that will be on credit line, which can handle your both unsecured, secured credit lines.
And definitely, it needs to be agile and have capacity.
And I was talking about the velocity and the volume, the LMS needs to cater to that in real-time disposal, faster utilisations, as well as the product rollouts, like today, one variant that you are launching and then you want to put up other variants, right?
Next, are the volumes how you can handle the multiple volumes because multiple PSPs, your own platforms, that’s where the challenge comes. At the same time, you should be able to do the reconciliation because in the entire interest calculation, all things have to be done.
And last but not the least, the platforms must be able to support your configurability between the unsecured and secured. This was just what I wanted to give you a short glimpse on the tech know–how, I rushed to it, but these slides will be available and without taking much of time because we have the panellists’ right there. We’ll try to get the deeper insights from there.
So I take your pause here and, and as soon as we move to the panellists, they will introduce themselves and then we’ll take up the questions as we proceed into the discussion from the audience.
Feel free to put up a question in the Q and A or raise your hand at the time to time, we’ll take a break and pick up your questions. But before that, we want to have a quick poll, on the similar topic. We just want to sense that how the audiences are thinking about the some of the elements.
Can we have the first question?
The first question is probably that how do you use your current elements tech stack to support your credit line on the UPI? What are the things that you are looking at?
Like you need to have the flexibility, seamlessness and the innovative offers, right?
We’ve got almost 50% responses we can.
So, this is pretty clear, we’ve been talking about this. Audiences also feels the same.
So before taking more time, I’ll get started. So again, I’ll welcome all my panelists. We have a lot to discuss. I’ll start with Sajish because he has to step out due to his prior commitments.
I’ll start with you, let’s get into the details. This is a new product which has been launched in the market and bankers like you are exploring the different options to run this product.
What is the short to long term reason for the UPI on credit line?
How is it going to evolve and how it’s going to be adopted? That’s probably the first part.
The second part, we also wanted to understand how the banks are gearing up to respond to that.
Sajish Pillai
Good afternoon everybody. I think you’ve very well summarised the potential of this development.
I think from a potential point of view, in my personal opinion, I think this is a great product at the right time that has been introduced by the NPCI and the regulator is also supporting it.
But just comparing it and saying that it will be similar to OD product or a credit card would be just limiting the potential this change has. In my view, there are two or three broad usages of this kind of a product in the market. From a banker’s perspective, if you look at, if I have to give out credit in the market, I need to know the customer well, and I need to know the intent and ability of the customer to pay the loan back. There are costs associated with doing that in underwriting.
There is cost associated with servicing and there is cost associated with distribution and collection of the money that is given up. In a traditional product like a credit card, the costs are very high. So you have the cost of embossing, you have the cost of managing the associations, the payout to the associations. Obviously, the rewards is not cost.
This product allows us to disrupt the economics of giving out a credit line which can be very low.
And in one of the conversations earlier this year, I had presented a view where if there is enough information about customers using UPI which can be possibly facilitated by NPCI, there is no stopping a lender to provide a guaranteed line to everyone who can show that intent and ability to pay.
For example, I think there are about 300 Mn customers who are using UPI. If we have enough information about these customers, let’s say we come out with a very strong and robust score card which allows for the determination of intent, ability and capacity to pay, I can go out and tell that customer, please go and link this account that I have already pre-approved for you to the UPI and this is available for you. The line can be as small as ₹500.
So that’s the power of this product!
And, it’s definitely, it looks like a credit card. It can completely disrupt the credit card industry. That’s number one. Second, I think the behavior of the customer has changed completely over the last 6-7 years since UPI was introduced.
You have almost everybody in India using UPI as a second nature. Smaller ticket transactions have moved away from credit cards. Even the credit card holders don’t use a credit card for small ticket transactions. It has moved to UPI.
This product provides an avenue for moving that small ticket transaction from a debit card or a savings account to again a credit card. And that allows for additional ways of understanding the customer and providing some kind of revenue opportunity which was lost.
Furthermore, I think it has the ability for us to understand a customer and also provide a holistic view of their finances. Today, what happens is a customer uses UPI, he/ she has linked various debit cards on the account that he has.
There is a propensity of a customer to not dip into his savings but look into a credit facility if he’s prudent enough. And I see that in the long run, with the credit line on UPI, it may become a second nature, a person would consolidate all its all his spend into one.
And that will allow for the creation of various products on top of this credit line on UPI product and allow for having a holistic view of what exactly a customer does. So, those are two or three large scale potential opportunity that we have, Shashank. On your second question on how banks are looking at it, we are very excited at DBS. We are very excited with this product being introduced.
We are preparing ourselves to be able to partner with players who have large platforms with customers who can be on boarded to DBS through this product. We are looking at partners who can bring us new to bank customers through this product ,where we are able to underwrite these customers to add for as low as a ₹500 loan or, or a ₹500 credit line.
And once we understand the customer better, we’d like to give them the entire sort of banking products that we have in our portfolio. So that’s how we are looking at leveraging this new development.
But yes, there, there is more clarification that is supposed to come to NPCI.
But I think this is an exciting phase and we are looking at this product to be able to expand our reach of credit to every nook and corner of India.
Shashank Shekhar
Thanks, Sajish. This is a pretty good insight.
So I’ll come back to you Raju. One of the very important points I just raised about it getting in a complete view of the customer finances. And where that holistic approach to look at that all the dimensions of the UPI and get that single view. And that’s where that integration between the UPI switch and the LMS becomes very critical.
So how do you see that the multiple stacks coming together and providing a kind of the expectation that banks are having?
Rama Krishna Raju
Yeah. I’ll just take actually two minutes of what Sajish mentioned.
I think he has taken the banker’s view of you know, ideating, let’s say someone giving a 5000, 10,000 credit, who’s new to credit and just give that and then graduating them to a personal loan.
I think that that’s what some of the NBFCs have done in the providing that kind of credit facility on BNPL.
And I think it’s very important aspect that, you know, we’re not targeting those customers who have like a five lakh or a six lakh credit card limit, right?
And again, typically, even as an individual, I feel sometimes let’s say if I have a heavy balance in the savings account and we go and put up the UPI pin. So sometimes, even though knowing that that technology, we feel uncomfortable having a bigger balance and you actually have two accounts, one account has a UPI linked and another account, you don’t actually use it, even though you have UPI on it.
So this could be a line. And, it happened to me last night. You know, I was just trying to pay someone and if you just have one UPI account, the bank network is down, you don’t have an option to pay it through another, UPI network, another account or whatever.
So, I think this can be a very good that way in both perspective- An alternative to debit card usage and, and graduating the new to credit customers, I think both these are very important.
Coming to your question in terms of you know, as we understand, all the banks have got a UPI switch one or the other. The UPI switch typically routes the data when there’s an integration between a UPI network and the bank’s internal systems, they either go to the core banking or a credit card.
So this will become another routing. The way we have envisaged and talked to some of the banks and the UPI switch companies. It will become another hook on to the existing switch.
Yes, it is additional development. That’s where, you know, some of the banks are actually looking at utilising the credit card infrastructure or a core banking infrastructure because that link is already established.
But in a long term, if you want to see this as a completely different product offering and graduating them to a credit offering or if you’re looking at getting a personal loan when, when the customer actually utilising this credit limit line and then he’s paying it properly, you want to offer him a personal loan or whatever. In that case, then you know, having this in Loan Management System (LMS) is also an advantage.
And the differentiation again, if, if I’m an existing credit card customer, and having the same features as a credit card, I may really not be getting much out of it, my repayment ability to pay that line. If I get a different flexibility, that will also be advantage, that’s where, you know, we were, we were looking at LMS as option you know, instead of just focusing on a credit card.
And again, it depends on the volumes that they’re looking for. And if there is going to be heavy, you know, let’s say they’re looking at lakhs of credit lines to be given.
And if this product really becomes successful, like the any other, product that become very successful, then maybe the card system may not be the right place because, you know, for a small transaction is the cost of operating a expensive credit card management system, can that be more into a low cost LMS kind of a thing wherein you don’t need to have a per transaction model, you can have a different licensing model so that, you don’t have a upside of per transaction cost, right?
Maybe today in the credit card system that per transaction, there are banks who have per line kind of a costing also. So that’s where we see as an alternative coming in.
But again, I think the story has to evolve and then we start, the banks may start with the card system as that is the easiest way to launch and then graduate further without actually changing the backend. We can always migrate those lines from the card system to the LMS.
And then, you know, LMS can become a kind of a multiple variants can be launched here. That’s how we see it.
Shashank Shekhar
Thanks, Raju.
So in case if we have one or two minutes, I’ll pick a very interesting question which has come.
So, Sajish, the question is how the credit line on the UPI would be different from the BNPL options. Be the terms of its principles or the target customer integration. How do bankers see that?
Sajish Pillai
So, I think BNPL can be replaced by credit and UPI. So that’s one product innovation that can be done.
I don’t think that’s the only thing that can be done. Learning from what has happened in BNPL will allow at least for the banks to be able to ensure that there is no credit loss there. There are more guardrails around letting the customer know how much he’s spending and what he’s spending on can be utilised on credit UPIs so that he does not get over extended.
But yes, BNPL type of a use case definitely can be built on credit UPI. That’s not the end of it. There is much more than that.
Shashank Shekhar
Thanks Sajish. I know that you need to step out. Thanks for spending time with us.
So, we’ll continue the discussion. And then again, take some questions.
I’ll come back to GP ji. You can just have a quick intro about yourself and then respond to my questions.
So really just wanted to understand. It’s very much similar to credit card, right? It’s an influx of the payment and the lending.
How does the bank see that making what kind of the technology they look and need to be ready to enable something again, very similar, which is a mix of the payments and the lending through the UPI credit line.
So I just want to look at how the banks are looking at.
What are kind of the options are there?
GPJ Gupta
Good afternoon to all of you.
I, GPJ Gupta, head the Business Solution Groups for Kotak Mahindra Bank.
Coming to your question. Yes, this credit line on the UPI looks like in the BNPL or extended credit limit on the credit cards. And even if you ask me as a banker, I see there is a simple pre-approved OD limit to the customer revolving OD limit to the customer.
And I can open the separate OD accounts in the core banking system itself and create the different UPI ID and give the customer. When the customer goes to the PSP app for checkout, customer can have the option for making the payment to the regular bank account, that is savings account or the current account, or you have the option to use the credit line. And when the customer chooses the credit line, the transaction goes to NPCI. It then sends the issuer switch, because the UPI switches are common, correct?
And when it comes to the switch, which knows that it is of the credit line ID, EPA and you can pass on to the core banking of the bank. It knows that this UPI id is mapped to the OD account and the OD account will be debited and come back to the NPCI switch.
It’s very simple if you ask me in the banking terms and if you go with a very small model, but, of course, it comes with its own challenges. Like Raju mentioned that if the banking system fails/goes down, then the customer will not have access to his debit card or you will not have access to any NEFT, IMPS or other payment gateway.
In fact that it all will be down, the credit line also will be down, and the customer would not be able to access any of the credit line of the bank account.
Hence, there is a possibility of options discussed by the various banks.
Whether we can have one more system for a credit line usage through the UPI. That system can be either the credit card system or BNPL system, because most of the banks already have a separate BNPL infrastructure.
Or we can explore a completely new system so that you can design the product the way you want it to have more flexibility and have the different rule engines or you can define the rules based on the PSPs.
You can get tieups with the account aggregators, because that information is very critical when you take the business decisions because either the subvention or different kind of charges which you levy.
What are the credits you get from the merchants? Probably the existing systems may not be having that kind of flexibility to define the product.
The credit line system can be a third option. But if you ask me, at our end, probably we are looking at the only two options, either to use the existing BNPL system option or the existing CBS. The only challenge we see if you go to the second option where you can have different systems is the BNPL system or the credit line system.
See, because the switch is a common and the transaction leads to the switch. And if you have a different system for the credit line, then the switch has to route the transaction to the credit line. And this credit line system may not have the customer level exposure because the limit which you are going to give for the customer is a predefined limit. It is an interoperable one between all the unsecured products and the secure products.
That might be sitting in each and every bank is already established the systems for the customer level limits, correct? And if the limit is in an interoperable one, first the switch has to go and check in that limit system, which we call as a pre-approved limit system or something similar. Once you could get a response, it has to go back to the credit line system, has to get the confirmation, then it has to send back to NPCI. You see multiple hops are getting created on the fly to improve the transaction.
Then the transaction volumes will grow up very high because we’re already seeing the UPI transactions. We’re expecting that once we enable this feature by all banks, we expect 300 Mn customer base can be a 600 Mn customer base and 1 Mn transactions can be 3 Bn transaction in the next five years.
But really, will the UPI switch be able to take that much capacity? Scalability challenges has to be thought through before any decision can be taken by the banks
.
And that is where we are into the flux about the best solution to implement. And the other option we’re exploring that can we have the separate switch itself? Because NPCI as a broad feature is giving the opportunity for the banks, the issuer bank can have the different organisation ID itself for the credit line, correct?
And if I take the separate organisation IDs from the NPCI for only the credit line, then I can have the different switch, or in the switch load itself I can change the routing logic.
If the VPA which is allocated to the credit line, I’ll have the different org ID, it will have the separate IP address which will provide to the NPCI and, NPCI will pass the transaction to the issuer bank with the different org ID. It not disturb my existing switch at all, not increase the load on my existing switch.
For the credit line transactions, you can have different switches and you can have the different credit line management system. The transaction will go very smooth and seamless. Then you have to see that how reconciliation can happen.
And the NPCI is offering or we can confirm that NPCI is offering the different reconciliation settlement files if required from the credit line. Hence, you can build actually different credit line, different settlement for the credit line transactions. The options are plenty.
If you ask me, I don’t think there will be any complexity, but it is only the option available to the bank, we need to take the correct step now.
The decision making is very important based on what your future projection of the transactions. I’ll give you a simple example from the credit card side. There are 300 Mn UPI customers in India, correct?
And if we go back to our own bank database, you know that 30-40% of our customers are already in the UPI and within that base, how many are new to the credit and how many of them are already paid?
If I target for the new to credit, it will help for the customer because with, with the smaller limits for you on board, the customer is a new to create customer, I’ll give the pre-approved limit to that customer, correct.
And once the customer starts using the credit lines, based on the customer behavior in next six months or nine months, you will have the very good credit score and he/she will be eligible for the credit limits, unsecured limits like a personal loan or higher credit card limits and everything, correct.
There is a bigger opportunity for the banks to attempt all these customers. Just go and scrub your data with the existing UPI active customer base and give the pre-approved loan. That is where it will help the banks to adopt this very quickly by the bank and as well by the customers and probably NPCI will get higher volumes of the credit on UPI.
So, the decision is very important that how we are going to take your system keeping the scalability because already we have high visibility of the UPI transactions. It is not an unknown product for the bank.
Everyone knows in the country about the growth of the UPI transactions, and keeping that in the mind the requirement of high resilience and high scalable operations.
The decision making is very important for you. That is what is my suggestion is to all other my co-bankers, Fintechs, account aggregators etc.
Thank you.
Shashank Shekhar
So, Rahul. I’ll come back to you. And because we have seen the bankers view and since you are the architect I would call it so, for this product. You may be interacting with a lot of TSPs, the PSPS as well as the bankers.
How do you see the data tech optionality’s evolving from the banks as well it’s also dependent on what kind of features is getting developed like scalability. So what are your views coming into that?
What are the options that are getting explored? What is the expectation for the PSP side, if you can just throw some light? And that’s why probably one of the questions is also about the role NPCI is going to play in overall whole stack.
Yeah, thanks.
Rahul Solanki
Hi Shashank. Sure, please don’t mind my voice. I’m not keeping well. Just wanted to highlight on the fact which GPJ Gupta mentioned some time back that it’s very important that the bank choose the right stack. So what is currently happening since I’m interacting with most of the banks to understand that how they are looking at the solution, and what they want to do.
It is broadly categorised into two platforms- One is that they want to run their existing system, the way it is. For example, the banks are already doing their overdraft, they are doing their personal loans.
So, these are two different systems, personal loan – never part of the CBS and overdraft- part of CBS.
So having recommended to all the banks that, you know, if you really want to scale this product in the future and not do it for time-being approach. And I would launch a product, I want to go ahead with this.
The best approach is to have a separate org ID, or as Guptaji also mentioned that we offer that flexibility to the bankers that if they offer a separate org ID, the routing of the transaction, the seamlessness, which bank would have to route a transaction within their banking system would be quite seamless.
So if you have a separate instance and a separate org ID, you can route it to the right system at any point in time. So what happened?
Let’s say give an example that one of the bank goes live with the existing org ID, which is part of the CBS.
Now in the future, they also want to participate in other loan categories like personal loan, consumer durable loan, which are not part of CBS.
What happens that the additional hops gets in a way if you have a same orgID and being a different system and having the same settlement files, raw files would also create a haphazard within the organisation within that interdepartment that-
How do I reconcile this?
So it’s better to have a separate org ID, separate stack.
The best part, I think even Rama Raju mentioned that why a bank has to go for credit card and not for Loan Management System (LMS) and vis-a-vis? So both have the pros and cons of credit card system as a costing a little higher than the LMS. That is true. Second part being, being in LMS right now, it’s not that bank would like to change it in a near time.
You know, even they take a lot of time to change any vendor or even get a new stack implemented. A lot of us are involved. And the way LMS currently works in a traditional way, it has to work very differently.
The way it does in UPI because everything happens real-time, your limits has to be managed in real-time.
The repayment has to be managed real time. Shashank already covered all this, so, I don’t want to go through it again. But I think it was very briefly mentioned that, you know, the LMS tag the way they it is right now or Loan Origination System (LOS) otherwise you can name it as if they cannot go as, as the way they are functioning currently in the banks. They have to be very different.
They have to make sure that how to, the repayment is a bigger task.
If you ask me, even the personal loans which are getting disbursed, it’s quite simple today that you know. You book a loan, you get a personal loan being paid by the user every month, but this will be very different.
This is something a line, this is not a personal loan, but there in the savings account, it’s a line which will be given to the user and he can spend as and when he wishes to. I think we discussed about NTC as well due to credit existing to credit. I think this is more from a predefined credit line.
Obviously bank has to scrub their own base in advance and make sure they push it to the right audience that how they want to offer it, how much they want to offer it. So it really depends on that.
I think one of our fellow colleagues who was the speaker, who left some time back even he mentioned about the scoring methodology which is very important for the banker’s UPI score. So I think most of the banks today are running the UPI score over the CIBIL score as we speak.
I think if they do that right in a way to offer as low as 500 or 1000, I think it’s a good start with.
And NPCI is also working currently with bankers to define a new functionality where we would help you guys (bankers) to increase the credit line on the fly, which you might have never bought it like it’s most from a customer reaching out to the bank, mobile banking net banking or calling customers.
We’re trying to figure out a solution where a customer can further enhance his limits. If bank has already done his coming or maybe he can still apply for a limit. And if you can consider him real and good, he can increase the limit also. But this is interesting.
Shashank Shekhar
This is really interesting! Rather than customer depending on the bank, the facilitation is from the network itself.
Rahul Solanki
If a customer is requesting for it because they need it, and the bank says, yeah, I can. Because this won’t be real time. I don’t foresee it happening real time. But if bank has done scrubbing and as you said about your BRE, it has to go to BRE to check the validation.
Where can I check if the bank has done the needful, you can push and say Rahul, yes, you have got additional credit line? Do you want to accept it?
Shashank Shekhar
Thanks, Rahul. So I’ll just take a question from the audience.
Rahul Solanki
Just a question session before we move ahead, we would like to know the participant and from where they are talking. OK.
Audience (A G Ramakrishna)
Hi, thank you, Shashank.
I’m A G Ram Krishna from card 91. We are certified with NPCI for the PP I and multi-currency and our credit card stack. The switch has been certified, the card management system is what we are working on right now. So all of you have addressed the right way of explaining, you know, whether to use a credit card system or the LMS or the new system altogether.
The question I had was with respect to the OD, which is being handled by the bank and predominantly on the CBS. Is the handling of the OD limit similar to a credit card or does it happen as a term loan?
So that was one and about the UPI score Rahul, who provides the UPI score based on the UPI transactions happening? Is it NPCI or bank has to design on its own? These were my two questions.
Rahul Solanki
I would like to answer the second question. We have defined UPI scoring method at our end, we are waiting for some approval to go ahead with. Apparently, most of the banks today have already defined the UPI score for the major top issuer banks. They have their own scoring methodology based on the UPI transaction done by their customers.
So most of the banks are having it as we speak and we are also working on it that how do we leverage that fact to give it to the banks? But we are awaiting some approvals on that part. Right now NPCI is not providing UPI code to anyone as we speak.
And even if we provide, I don’t know where it would help because it’s a pre-sanctioned credit line. So, bank has done the needful already. For the real time, the UPI score would have helped banks to understand and then do underwriting on that part. Right?
Audience (A G Ramakrishna)
Ok.
GPJ Gupta
I’ll take the first question. If there is a term loan or OD, it will take as a revolving OD, based on the pre-sanctioned limit, we say the ₹5000-10,000 rupees OD limit we are giving to the customer. They can use that limit for one transaction or multiple transactions as and when the customer repays some partial amount of the full amount, you can use the full amount of the limit.
Hence it works as a regular OD.
Audience
For the revolving OD, do you give a billing cycle and the payment due date or that part of it?
GPJ Gupta
Yeah, that that part of it actually, some core banking systems can be configured. You can have some free grace period where you don’t charge to the customer. Like, in the case of a credit card, you normally get a longer period of 45 days from the time you buy something and the time you get a free credit period.
Similarly, in OD also, you can set the free credit period based on each of the core banking systems as per different banks using it. And after the free credit period, the core banking system will start interest or a penalty or a charge, whatever the way you configure in the system.
Shashank Shekhar
Thank you GPJ and AGR.
Since our time is limited, we’ll just continue with the set of questions. I think we have many questions which are related to the business side. I don’t want to pick up the questions have been answered in the previous sessions.
You can visit our YouTube channel and get answers about this discussion. Right now, we want to focus more on the tech. So Raju, now I’ll come back you because now you are at the core of this whole discussions, right?
And we heard the GPJ and also Rahul and also brought a very interesting point, right, that existing LMS, we have the limitation because it needs to respond to the emerging demands of the real-time, multiple variants and all these things. So how do you see that LMS needs to evolve and typically what the structure that you see for the LMS to support this product to scale?
Rama Krishna Raju
I think that what Rahul has mentioned is absolutely right on the existing LMS system because LMS they were traditionally designed for term loan products. They’re not meant to be a credit line products and they’re not meant to be online, you know, the UPI as a concept is all time bound, right? I have to approve this transaction within time.
So, but typical in a loan management systems were not designed in that kind of a mindset.
But I think the point of lending what we said in terms of having the BNPL system is that they’ve designed for lending to customers, right? So, we have the LMS systems having that kind of a latest product, like a BNPL or an OD kind of structure they can support.
But if there are banks that are having some traditional LMS systems, they will not definitely be able to support this product. That’s where, you know, we, Pennant have a solution on lending. We can do a term loan or a line product and within the line product, we can also do multiple variants. We can do a simple OD product which is like a credit card. I can repay for 30 days and I get a grace of 10 days or 15 days and then I get a bill, an invoice and then customer can choose to do a repayment via payment gateway or debit his account within the bank.
And also we can do things like what Mr. Rahul has mentioned in terms of increasing the credit limit on the fly. So customer has gone to a transaction, he sees that the limit is lower, from his mobile banking to the bank, he can actually initiate if the bank has already underwritten the higher credit limit and if it is stamped that particular, so we can also do on the fly increase of the limit, right?
So that’s something that we could do and some banks are actually doing it. Like, if you have a sustained usage on the credit card, they send you a link and then you click on a link and then you immediately increase the limit on the fly, right? So, some of them are able to do so.
The new age Loan Management System (LMS), yes, they can do. And that’s where you know if there is a BNPL already we are supporting. Similarly, instead of doing a simple credit product, we can also do like a different way wherein I can start charging the interest based on the transaction.
So if you do a transaction today in middle of the month, on let’s say 23rd. I can bill the customer from 23rd to 30th and then 30th customer can repay for the usage of that particular amount. It’s again how they want to structure the interest computation on the product, right?
That could be one option.
The next option could be I have a UPI credit line. I can also do kind of a flexi kind of a product here. I can actually utilise the entire product, convert that into EMI structure also.
So I have a limit line of, let’s say 10,000. So in that I can utilise 8000 this month.
But if I’m linking that to an OD and on a term, I can convert that 8000 outstanding to some kind of installment structure, let’s say some ₹1000 of that 8000 now. And then my limit will come down to 7000 and the customer pays interest on 7000 only.
So that could be another variant that we can bring in because from a regulation or from a guideline perspective at this point in time, we have not seen that kind of either a straight answer, say that, you know, these are the variants that we can offer or we cannot offer this variant at this point in time.
That kind of it, it just simply saying that it’s a credit line product. And there could be option like what we do in the credit card. I have a credit line and I’ve done a major purchase. I have a ₹25,000 credit line. I’ve done a purchase of ₹10,000 which I was supposed to pay by the end of the month, but I don’t want to pay that. Can I convert that into you know, kind of a term loan?
So take the transaction of 8000 maybe in the back end. I have been underwritten for an unsecured personal loan up to some limit and then I can just take this loan and convert to a small personal loan which can which can release my credit, but still my overall credit line that I know, I have been stamped at a customer level is not breaching, right.
That’s what Mr Guptaji was saying that, there are central limits that we can attach. So that the customer is actually at a lower limit. Also, we are offering them a kind of a very flexible credit products that we could do. That’s the advantage that you know, from a product feature perspective that we can talk about it.
Thank you.
Shashank Shekhar
So, before we go into another question, I’ll request my team to go for another poll question. Just 1 minute, 30 seconds, we’ll take an insight into other different aspects.
Can we have the poll please?
What major tech related changes do you foresee implemented credit line on the UPI? (within your bank)
I think tech is still is being looked at, and challenges to put this product. So this is very interesting, either it could be the legacy structure or the kind of the flexibility and the scalability to bring at the table.
Okay, you can stop the poll now. Thank you very much guys. It would be interesting to take an on the fly view. Also I’d request you to put up on a feedback form, it’s in the chat section.
Please share your feedback. It’s always help us to improve. I know we’ve not been able to pick up many of the questions. I think most of the questions are coming from the products and but still, we’ll try to pick it up.
What are the main use cases that come up by designing this product? Where do you say use cases coming up? And how do you see technology supporting it?
Also, people are still talking about the challenge and the tech side rather than the processes. But if you want to share some insight on it inside, there are use cases responding to the existing tech challenges.
GPJ Gupta
So the use case which I see that customers who are new to the credit, who as of now doesn’t have any of the credit card or any BNPL limit or OD limit within any of the banks. And when they go to any of the PSP apps or the merchant apps or apps, by doing it as check out.
And if they get an option suddenly saying that you have a credit line, you may ask that, that did the customer get that option. Like you said that there are 300 Mn customers that go back to my own database.
I can see that how many NTC customers out of this 300 M are actually banking with us, but probably with a small value who may not be fit for issuing the credit card because credit card is very expensive for any bank to issue it.
And if you, if you have the pre-approved lines, credit lines, but these customers with a smaller value, probably you may say that the 5000 or 3000 or 10,000 kind of limits you set it and dynamically if you give that option to your closed loop aggregators or closed loop PSP partners. And if the customer gets that option, customer will be very happy because when you give the credit line to the customer who never have a credit history at all, we help the customer to build the credit history CIBIL rating so that you, you’ll be able hold to the credit in the future and you can get a better and bigger credit limits from the other banks and the personal security, personal or unsecured or secured loans, correct?
And how it will be a challenge for the technology is that when customer is giving the option for the credit line, and how instantly at that point of time, you’re going to show this limit because you don’t know where this customer goes to, which PSP or which aggregator that is where the first technology challenge comes in.
Secondly, once the customer operates the credit line to use, how quickly can you process this transaction because you may require more information. Next, if you have the very complex structure backend for the improving that limit and improving the transaction, then you have to see that how much time it’s going to take to approve the transaction.
These are the tech challenges. And that is the reason your decision making on technical architecture, scalability and resilience is very important. This is the reason, user cases and technology decisions should go hand in hand, it cannot be an isolated decision.
Rama Raju
Just one point, Shashank I wanted to add. I think the reconciliation (recon) has been one of the biggest challenge, you know. Even in the existing transactions, while we as a customers, only see, scanning the code.
But in the backend, majority of the times there is reconciliation for a failed transaction, duplicate transactions or whatever that. So while there are a lot of things handled offline, but there is also a T plus one or a settlement that happens.
Another important area from a tech perspective, they’re introducing a separate system that needs to be taken care in a manner so that, the customer need not have to wait for. If there are any disputes while handling or the recon is also very big, you know, subject that we have to consider in the implementation. This is something that we understand.
There are challenges on the existing UPI, on the debit card lines- debit card payment using the savings accounts also.
Shashank Shekhar
Thanks Raju, thanks and thank you, GPJ. Thank you for spending time with us. I know you’re traveling.
Thanks for your time. With the permission from Raju and Rahul, just cover up the closing call.
So before that, I just have another poll question
Primary, what are the critical factors, right? Where do you see that? What are the important factor.
Which of the following factors will be put the most stress on the credit line on the UPI tech stack?
Is it the volume that you anticipate that we will have challenged or expected to bring the variety to different loan offers or the speed?
I think every point that has an equally right and volume to bring the variety as well as speed, I think.
Thank you guys. Thank you for responding.
Again, sincere request to everyone, please share your feedback.
We are towards the end, end of the session, maybe just pick up that closing. So before I wrap up, I’ll come to you, Rahul, maybe you can just share your closing remarks.
What are the thoughts that comes to your mind?
How do you see the future evolving and also maybe talk about some of the challenges that we foresee.
Rahul Solanki
As a question, we should ask, it was a fantastic question. I think the first and the third one goes hand in hand. If you support the volume, you have the speed. So it’s both ways.
So if you do, you cannot get speed without supporting volumes. From perspective of defining extract from banks and as I said previously, also, it’s very important for you to understand not for a time being today, I have one product and I want to launch it, strategise, and understand the potential use cases to go ahead with.
Because if you launch only one product, and the tech stack is not capable of defining one more product, it’s of no use. So, as a bank, it has to be there to support personal loans, consumer, as you mentioned about your secured FD, having a secured loan against the FD against a gold credit line product or interest free part.
So if all these things are supportive, it’s something which a bank should define and go for tech stack. And as I recommend again, bank has to go for a different instances within the UPI switch.
I don’t recommend to go for a new UPI switch altogether, because that’s a heavy work for the bank to do all together again. So they can build the instances within the UPI switch and have a new org ID for credit line products.
Even the routing of transactions which they have when they receive something needs to be very seamless soon as the bank defines. The most important part is not tech stack but about the user awareness because as we mentioned earlier, this would target the customers who are not exposed to credit products so far, they don’t have a credit history.
So they should understand about how they go about it. Whenever a bank onboards a customer, I think it’s very important to make them aware what are they offering, why they are offering and what a repayment schedule is. The major fallback of any product will happen only when there is delinquency goes up.
So it’s very important for a bank to make customers aware from the UPI part, we have made an effort that all the apps, we have asked them to create a separate UPI id for your credit line products. The customer can make a repayment on the UPI id which will act as an inward payment towards the repayment. So I think we are making an effort to do that.
Even for a bill repayment, we have different separate APIs as Rama Raju you mentioned about the EMI stack. We have APIs for supporting this, if I’m not able to pay my credit line dues, which are due right now, or if I do a transaction which was quite heavy and I cannot afford to make a bill payment, I can convert the transaction into EMIs in real time.
When I’m doing a transaction or after I have performed one, I can convert to EMI, depending upon the offers which banks are providing it for three months, six months or nine months with interest.
So it’s a good thing for both parties. For the customer perspective, he’s ok to pay interest and from bank’s perspective, additional revenue which a bank would earn.
So that’s all from my end, Shashank.
I think it’s very important, I would rather say that customer education is the key to grow, you know.
Shashank Shekhar
Thank you very much. Guys, please share your feedback.
We have not got much but your fair feedback is always an inspiration to us.
So, Raju maybe your closing thoughts on the overall thing?
And I know we have not touched on the role of the analytics, but indirectly, we have been talking about that. But maybe you can just talk about that how the analytics is going to play a critical role as a part of tech stack step that you’re going to pick up for the UPI on credit line.
Rama Raju
I think irrespective of whether the banks want to do this on a card system or a core banking or LMS, keeping that aside, I think analytics will definitely play a big game in terms of looking at their existing customer base, either there are new to credit customers or savings account customers.
I think coming out with that kind of a pre-approved limits and, you know, having that communication again, it all depends on the recent regulations that has come on the unsecured lending, which is again, you know, putting a bit of a weight on the cost of funds and some of those things we like to see that.
But having said that, I think analytics will play a big role in terms of identifying the prospect customers, tagging them with a pre-approved limit and then taking that to the market with the different offerings. Getting them to sign up and doing the proper onboarding, and then putting that onto the UPI network is a very important role.
Then second is that once I onboard those customers, checking the customer usage, checking the customer payment, repayment cycles, then enhancing the credit line. And sometimes, if the customer defaults, then, actually blocking the credit line. So analytics in all areas, onboarding to servicing is going to play a very big role in the overall thing.
And I think that has to be kept in mind. Again here, I think that the credit line that we’re talking about is a small ticket credit line. We can’t have the full-fledged credit underwriting going through the physical credit underwriting kind of thing, right? So that’s where the analytics and the rule engines and predictability in the customer, appetite for a repayment will become a very important role.
The cost of delivering the credit line has to be very lower. And then again, the banks cannot just, you know, give a limit line to everyone, even though it’s a 10,000 limit line, you can’t just go and stamp it to everyone. So I think the whole analytics will play a very big game. And so definitely the existing personal loan, credit analytics that are running in the banks that can be reused for the credit line in a different lines or, or different levers that are there. That’s how we see the whole thing from analytics side.
That’s our view.
Shashank Shekhar
Okay, thank you Raju. Thank you guys.
I think it was a pretty interesting, we touched upon lots of different aspects and we can get very close insights into that what bankers are thinking about it and also what the NPCI is guiding on it. And how the tech players are working on it.
Thank you, everyone!
If anyone would like to reach out to Raju, please feel free to reach out to us and share feedback, so that we can facilitate discussion.