Digital Lenders Seek To Use Blockchain To Solve The Problem Of ‘Loan Stacking’
A customer prepares to scan a Quick Response code reader to access a Bitcoin automated teller machine (Photographer: Chris Ratcliffe/Bloomberg)

Digital Lenders Seek To Use Blockchain To Solve The Problem Of ‘Loan Stacking’

India’s digital lenders are looking for a new solution to the age-old problem of ‘loan stacking’, where a borrower avails loans from various lenders within a short span of time.

Banks, microfinance firms and now digital lenders targeting small businesses have often found themselves blindsided as borrowers take on multiple loans from different lenders. This eventually leads to an increased risk of defaults. While banks now have access to the Reserve Bank of India’s Central Repository of Information on Large Credits to keep a watch on large corporate accounts, detecting loan stacking among smaller borrowers remains a challenge.

To deal with this problem, digital lenders under the aegis of the Digital Lenders’ Association of India, are working on a blockchain-based ledger to keep a check on customers who are involved in loan stacking.

The digital ledger is a loan information sharing platform made using private blockchain technology, Anurag Jain, founding member of DLAI, said. Jain is also the founding member at KredX, a digital lending platform.

“Currently lenders are only worried about checking the authenticity of the documents submitted to them, but they do not have a way to find out whether the borrower has received any recent disbursals from other lenders,” Jain said. A loan information sharing platform will allow lenders to check whether a borrower has applied and received the same loan from another lender recently, Jain added. The lender can use the customer's PAN information to check on borrowing history.

While credit rating agencies do keep track of total borrowings for retail customers and small and medium enterprises, the information is not always available in time to prevent a build-up of debt.

The borrowing information, according to Jain, can often take up to 30 days to show up on a customer's credit report, which is enough time for someone to take up large debt and potentially defraud the system.

How The Blockchain-Based Solution Will Work

The loan sharing platform being created by digital lenders is currently in the proof-of-concept stage and will soon be rolled out for digital lenders, Jain said.

The platform is designed as a decentralised autonomous organisation, so that it is not controlled by a select few lenders. Once these lenders sign up on the platform, they will be governed by a set of rules designed in the form of a smart contract. Under such a contract, new lenders would be able to enter the platform if they have 66 percent approval from the existing lenders. The existing lenders can also eject a lender who has been non-compliant with the rules.

Once they sign up, the lenders will be able to check whether the borrower is a loan stacker.

However, they will not be able to see who the other lenders are and what are the conditions they had set for getting the loan. This is expected to protect the anonymity of lenders and also protect any competitive advantage the lender might have. The lenders are required to agree to not use the platform as a customer acquisition tool, as per the rules.

The system will be open to audit through a third-party auditor. The current pilot will focus on SME loans for now and will later be opened up for all unsecured loans to tackle retail credit issues.

The Size Of The Problem

Should digital lenders succeed in building out the platform, they would help counter a problem that has been growing in size.

About 23 percent of customers of non-banking finance companies were found to be involved in loan stacking as of December 2018, according to the MSME Pulse report prepared by CIBIL Transunion and Small Industries Development Bank of India. These were customers who borrowed from more than one lender in a 60-day period. Digital lenders are also classified as NBFCs under the Reserve Bank of India's licensing norms.

The proportion of NBFC customers involved in loan stacking was much higher than what was seen across customers of banks, the study showed. The overall proportion of customers across NBFCs and banks remained steady though the absolute number rose, showed the study.

The share of ‘Loan Stacking’ borrowers in the medium risk category has gone up by 51 percent to 63 percent after 2015, the study said.

Post 2015, the higher proportion of borrowers in Medium and High risk bands suggest that the prudence level for sanctioning to multiple loan borrowers may have been slightly relaxed.
MSME Pulse Report - December 2018

The risk of loan stacking showed in the default statistics.

Among customers involved in loan stacking, the default rate has increased to 4.4 percent as of September 2018 compared with 2.5 percent in September 2015, the report noted. The default rate for borrowers with single loan sanctions was much lower at 2 percent as of September 2018.

The study shows that the riskiness of such loans has increased in the last 3 years and lenders need to establish prudent processes and policies to detect and mitigate risks arising from Loan Stacking behavior.  
MSME Pulse Report - December 2018
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