Borrowing on Blockchain (?)

Can blockchain and related technologies solve India’s huge lending gaps?
Written for an Indian business periodical (forthcoming).

India’s banking system has earned global recognition for its rapid growth in accounts, strong investment returns, and capable regulator.

But when Indians borrow, roughly 6 out of 7 steer clear of banks and instead tap informal sources[1] — family members, next-door merchants, and local moneylenders — to the tune of tens of thousands of crores of rupees (hundreds of billions of dollars). What accounts for this tremendous gap?

A lack of reliable data is likely the biggest root cause. Unlike informal lenders, banks rarely have first-hand insights. They need data they can trust to feel confident that a borrower will repay.

Yet in emerging markets including India, up to 95%[2] of micro, small and medium enterprises (MSMEs) are unregistered and/or family-run proprietorships. Such businesses and their owners seldom have records in credit bureaus like CIBIL because they have never taken a formal loan. And neither in India nor in any neighboring countries is there a single credit bureau that captures records of timely payments to utilities, retailers, suppliers, vendors, business partners, and employees.[3]

Banks’ need for data they can trust is where blockchain technology may help. Because it is a decentralised ledger, every record exists in multiple places and can’t be tampered with at a central level. And because it is a “chain” to which new data is always being added, records that were written earlier can’t be edited without all record-keepers agreeing.

Governments have quickly begun testing blockchains as a solution for corruption and disputes related to public records such as property titles, proofs of identity and even educational certificates. See NITI Aayog’s IndiaChain project.[4]

But while these data sources can help to avoid errors, they’re likely not enough for banks to make more attractive loans than informal lenders. An instant assessment for an unserved person or business is only possible when many more trusted sources of data are available: telecom spend, business payments, income generated and others.

How comfortable will payment and telecom networks, FMCG brands and distributors be about making their data public? What incentives can government create for these entities to make valuable customer and business information public? What remedies can citizens turn to if incorrect data about them is publicized?

If banks are to earn global respect not just for account openings but also for scaling up lending, they would be wise to consider these questions. Blockchains can build trust and governments are excited. But the incentives and mechanics around how private data sources contribute to profiles on a blockchain are where things will start to get tricky.

[1] Demirguc-Kunt, Asli, Leora Klapper, Dorothe Singer, and Peter Van Oudheusden. 2015. “The Global Findex Database 2014: Measuring Financial Inclusion around the World.” Policy Research Working Paper 7255, World Bank, Washington, DC.

[2] In India, for example, the IFC estimates 60 million total MSMEs of which 58 million (more than 95%) are informal sector enterprises. Micro, Small and Medium Enterprise Finance in India. IFC, 2012.

[3] Doing Business Database 2017. Getting credit: credit information. World Bank 2017.

[4] http://pib.nic.in/newsite/PrintRelease.aspx?relid=173334