An Uber for Asset Backed Loans- is the future of secured lending branchless?
This blog has been authored by indiagold cofounder Nitin Misra, it was originally published at Times of India:
It’s late at night, you finally got time to binge your favourite show on Netflix and need something to munch. But there’s nothing in the fridge. Consider this parallel universe where there are no food delivery apps and you have go to a restaurant to get the food! Or think about this — you have a train to catch. You need a taxi. But there are no taxi apps and you actually need to go to a taxi stand yourself to get one.
Nuh uh. This can’t be happening. #BASIC
Each day with hundreds of start-ups making ‘Uber for X’, we are becoming increasingly accustomed to availing services at our doorsteps, so much so that in 2022 it is considered a basic staple for businesses to provide. What that does is, it shifts the collective expectations of consumers across all products and services. If I can get a haircut at home, I should also be able to get a loan from home too!
But that’s easier said than done. Why? Well, banking operations are slightly more complex than making and delivering the perfect chilli chicken which has not gone soggy by the time it reaches you. We can blame it on our ever increasing need for convenience.
We are living in a time of a much higher degree of convenience compared to our previous generations. The service-deliveries that used to be considered normal erstwhile would now prompt a customer to shift loyalties to a competing brand since it’s regarded as a hygiene factor in the present times. Be it food delivery apps, taxi aggregators, or OTTs, audiences today expect the highest quality of services from the comfort and convenience of their homes. This has led to a paradigm shift in the collective expectations of consumers across all products and services, including financial services. Having said that, owing to their complex nature, financial services require considerable modifications and rapid technological shifts to fit the mould of new-age consumer expectations.
In today’s technologically advanced world, lending has reduced the intricacies of a time-consuming process from days to minutes. While financial institutions were among the first to adopt digital technologies when the sector was in its infancy, credit must also be given to new-age fintech businesses that are transforming the lending experience for borrowers.
With infrastructure between banks and FinTechs being increasingly driven by APIs, microservices, and configurable SaaS products, several banking products and services ranging from new account opening and Fixed Deposits to availing personal loans and getting credit cards sanctioned, can be built 100% online. Along the same lines, secured lending products where a physical asset like gold is involved as collateral can also be accessed through an app. Look at it from a bank’s perspective, of the entire suite of retail credit offerings that exist, unsecured lending products such as personal loans and education loans, while fast-growing and easily digitizable, accounts for 12.8% of the overall retail loan portfolio in India based on CRIF “How India lends 2021” report.
But what about secured lending products where a physical asset like gold is involved? How do you deposit a physical asset as collateral and take a loan against it on an app? Is it possible today to do this digitally without having to step out from your home? The answer is yes. Will 10 years from now, the next generation want to go to a branch to pledge gold. No. How? We will come to that.
First, let’s talk about the business side of things — from a bank’s perspective, of the entire suite of retail credit offerings that exist, unsecured lending products such as personal loans and education loans, while fast growing and easily digitizable, account for only a small percentage of the overall retail loan portfolio in India.
Meanwhile, asset-backed lending products such as gold loans, home loans, and vehicle loans, which make up for a majority of the retail loan book, still depend on physical interactions at the branch. Due to this, the lenders are forced to maintain expensive branch operations. This not only leads to an increase in their Opex/ AUM ratio (a core operational metric for bankers), but also severely limits their ability to expand such offerings to new geographies due to setting up of new physical branches, unlike other doorstep products or services such as e-commerce brands. Opex/ AUM ratio of two of the biggest gold loan NBFC players in India is between 3.6% and 6% as of Q3 FY2022. So, on one hand, we have consumers who want services at home and on the other, lenders who want to offer almost risk-free secured lending products like gold loans but find it difficult to strike the optimum balance between managing retail operations and branches.
There exists a very clear supply and demand gap in the market, which by the way, not accounting for TAM expansion and considering only the organized sector, is estimated to be about $50bn in India (gold loans market) and the unorganized gold backed lending market is estimated to be 3X the same. This is where full-stack gold loan products and services FinTechs come into the picture. Their moat is the use of technology to manage or automate the operational trinity of lending — front offices (Loan Managers visiting customers instead of customer visiting branches), middle offices (app-based auto servicing/ sales centres/ support), and back offices (banking operations, payments, underwriting, etc.) using technology.
For the consumers, it means a safer, faster and more convenient service. A professional Loan Manager comes to the customer’s home, assays the gold, books the loan and within 30–40 minutes the amount is disbursed to the customer’s bank account. Thereafter, the customer can manage the loan entirely through apps. Through all this, banks only need to lend the money — everything else is handled by Fintech platforms. As a consequence, Indian consumers, increasingly, prefer to get their gold pledged at the privacy of their homes rather than risking physically carrying the asset to deposit as a collateral at bank branches.
There is a common misnomer that borrowers with low credit scores usually opt for gold loans, which is the complete opposite in real life. For a business owner who has gold lying as a dead asset in the almirah, a gold loan is more prudent than a business loan for two reasons. First, gold loan interest rates are much lower. Second, in gold loans, one only needs to pay the interest component per month and can repay the principal at the very end. This means that for a trader or a manufacturer, the working capital acquired via the loan can be entirely used for investments and once returns are realized the principal can be paid back at the end of loan tenure.
It is imperative to remember that gold is an asset owned by over 80% of Indian households, regardless of the quantity. So, for any players trying to monetize this dead asset, one of which happens to be the Government of India, the objective is not a pareto optimal function! Futuristically speaking, 10 years from now, it could be considered just as strange to go to a branch to avail a gold loan as it is today to go to a restaurant to pick up food.
indiagold aims to fully leverage gold as an asset and digitise secured lending solutions across India, allowing banks and NBFCs to offer lending services without having to open or maintain physical branches. It also provides customers a suite of asset backed credit products at their doorstep with the click of a button. The first such secured lending solution, already live in 11 cities, is gold loans but the platform’s modular real time asset based lending stack is fully extendable to other secured lending products as well.
indiagold’s consumer and lender stack is designed to power the end-to-end journeys for secured lending products. Not just that, indiagold automates and fully manages operations from sourcing to loan closure and owns the relationship with the customer on behalf of the lender to provide a superlative customer experience.
As an example, in the first year of being onboarded to the indiagold platform, Shivalik Small Finance Bank has been able to grow month on month at an average of 35% and launched 6 new cities where it has no physical presence in a matter of days rather than months — all with zero operational overhead and zero NPAs till date.
indiagold’s managed operations service is built on top of a cloud based product stack which can be easily integrated with both banks as well NBFCs. The stack includes, but is not limited to:
1. Real Time Underwriting System (RTUS): Almost entirely, Indian banks use off-the-shelf Loan Origination Systems (LOS) for asset backed loans which are designed for assaying and loan booking at the physical branch. indiagold’s patented field LOS for secured assets allows agents in the field to assay, process and disburse loans within 30 minutes. This includes digitisation of various legal documents specific to asset backed loans such as lien set off, contract document etc. Once deployed, we become deeply embedded in business processes and integrated with back office systems, which makes us difficult to replace.
2. Algorithmic field assignment: Just like taxi booking and food delivery, managing field operations efficiently is critical to doorstep lending systems. indiagold’s proprietary algorithm uses complex combinatorial routing and optimisation algorithms specific to secured lending instances. This allows our field agents and central operations to maximise their efficiency and complete more service requests in a day than any other Business Correspondent that relies on manual scheduling. In the future we aim to fully algorithmize matching of customer’s demand requests with agent availability — automating several backend operations roles.
3. AI assisted gold assaying: Prudent asset valuation and management is at the core of secured lending. With our combined gold ornament imagery of over 1.5GB over the last 1 year, we are able to use image processing to recommend the purity of gold ornaments to our field agents. This aids in auditing gold purity testing undertaken by agents and ensures that loan book is backed by good quality assets. This is one reason why we have never lost a single auction.
4. Asset transit and storage: Using time real time GPS based tracking and an extensive alerting and fraud prevention system, our central operations team monitors field operations across all cities in India and in case of any discrepancy can initiate recovery or field support within 7 minutes. The asset is insured during transit and audited at various stages of the loan life cycle, including random valuation audits.
5. Collections and yield management: Few banks and NBFCs have their own infrastructure for managing their own collections and yield management systems for secured assets. Licensed lenders who have hitherto not been able to launch their own secured lending products owing to the complexity of infrastructure and streamlining of processes can now launch and manage their secured lending products in a matter of days. Lenders can easily manage their portfolio and track the health of the loan book on the indiagold lender portal. In addition, all official communications such as notices, reminders and other customer communication can be automated based on various rules. Compliance reporting such as loan details, DPD status, statements of accounts and portfolio tracking such as yield tracking and overdues can be monitored easily via the portal.
6. Managed customer support and automated loan servicing: While digital offerings focus on transactions, physical interactions focus on relationship building with the customers. indiagold uses a combination of automated self-service flows on the indiagold app/ web portal/ WhatsApp chatbots which are further managed remotely by a small central operations team in Delhi. For example, when a customer in Indore requests a part-release of an asset (take back some of the gold ornaments from those secured at the time of loan booking), a request is automatically sent by the algorithm to the closest Relationship Manager (RM) on its app. In the Loan Management System (LMS) the loan details are updated accordingly and are accessible to the lender via the lender portal. Where it would have taken a customer to wait in the bank branch (maybe multiple visits as well), the request is processed in a matter of minutes on the same day itself. 75 to 80 percent of all transactional operations post loan booking including general accounting operations and payments processing are executed in an automated/ self-serve model.
7. LMS and disbursal API based integrations: As a business correspondent compliant with latest current RBI regulations and norms, on the indiagold portal loan disbursals are undertaken via direct netbanking APIs from the lender’s account instead of using Payment Gateway based payouts as used by most lending platforms today. This insures that the lenders are fully compliant and our customer’s get a superlative experience with money hitting the account immediately as soon as it is processed by the Real Time Underwriting System (RTUS).
Just as a bank offers liability products such as savings account and Fixed Deposits as a source of acquiring customers and then cross sell asset products such as loans and credit cards, indiagold platform offers consumers a host of financial products that are typically offered in branches- albeit via the indiagold app. These include savings and investment products such as digital gold, gold backed SIP, locker services and even Fixed Deposits/ overdraft facility against gold asset stored in vaults.
The road ahead
Core banking functions have often been categorised under an organizational trinity: front offices (branches), middle offices (call centres/ support), and back offices (operations). On an average, operations consumer 15–20% of a bank’s total annual budget. In the next ten years, this trinity will evolve dramatically, with a focus on improving operational efficiency and enhancing customer experience using technology.
Our goal is to be the market leader in offering a platform for Indian banks and NBFCs to transition to such state for their secured lending products — thereby eliminating the need to open new bank branches and making credit easily accessible to customers at the click of a button. We are already helping our lending partners avoid years of expensive in-house software development and have showcased our ability to rapidly grow the overall loan book in a risk free fashion.
We also aim to utilise capital to expand and mature our product and technology capabilities to expand into new geographies and markets. Our strategy so far has been to focus on launching 3 types of products:
1. Products and features that are part of the core branchless banking system
2. Products that help in increasing operational efficiency over time
3. Products that help expand our market access and position us at a vantage point to build trust and cross sell other product offerings
We aim to continue launching disruptive products that scale and help realise our vision for asset backed lending in India.
We love to share what we are building at indiagold. You can read more about our tech initiatives at tech.indiagold.co
We are hiring. Write to us at hello@indiagold.co if you would love to explore some exciting opportunities at indiagold. Check https://indiagold.co/join-us for open positions.
