Money & Banking
Securitisation of loans key to develop small banks: Moody's
New Delhi : While non-banking finance companies (NBFCs) in India will continue to fund through securitisation, the practice of pooling of loans will be key for developing small finance banks, Moody's Investors Service said on Thursday.
 
"Securitisation will continue to be instrumental for these small Indian finance banks, as it will take time for them to develop a retail deposit franchise," the American agency said in a report here.
 
Securitisation involves pooling of financial assets or loans together to create a new security, which is then sold to investors.
 
"At the same time, NBFCs and MFIs (micro-finance institutions) will continue to fund through securitisation as the sector grows," Moody's said.
 
The Reserve Bank of India in September 2015 granted in-principle approval to 10 entities, including eight MFIs, to operate as small finance banks.
 
"With the aim of promoting financial inclusion to the under-served segment, the small finance banks will accept deposits and extend credit to marginal farmers and small business units. Their mandate overlaps with the target market of MFIs," the report added.
 
In both India and China, NBFCs are key providers of credit to individuals and small businesses that would otherwise have limited access to bank loans or would incur high interest for such loans, Moody's said.
 
"While there are various funding avenues open to the NBFCs in India and China, securitisation has proven to be reliable and competitively priced, and is therefore an important source of the funds the NBFCs use for lending," said Moody's assistant vice president Georgina Lee.
 
According to the US consultancy firm, the development of domestic securitisation markets will help both India and China achieve the objective of financial inclusion.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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Innovating with Algo Lending
Profit motive and competition funnels funding to the unfunded better than government 'schemes', as this example of a finance company shows
 
The Reserve Bank of India’s (RBI’s) College of Agricultural Banking has announced a case study competition for bankers to find innovative ways of lending to the MSME (micro, small and medium enterprises) segment. The objective of sensitising bankers and getting them to think innovatively is laudable; but RBI officials would probably learn more about innovative lending by speaking to their own regulated entities in the private sector. 
 
Last week, I was talking to the head of a rapidly growing finance company with a massive year-on-year growth in loans to first-time borrowers. He told me about the big increase in loans to micro-borrowers that included hawkers, small shopkeepers and non-salaried individuals, who were shut out of the formal borrowing system. Typically, these were loans of Rs30,000 to Rs1 lakh with tenure of about 12 months. He called it ‘algo lending’.
 
His lending is based on evolving a proprietary model that minimises the risk of default, having identified the common characteristics of borrowers trying to fudge while taking a loan, or more likely to default. Simply put, he arrived at these characteristics by first giving loans to a bunch of people, profiling them under numerous parameters, and then studying their repayment patterns. This model, based on the law of probability, works better when more data of borrowing and repayment continues to be added. 
 
Some of the findings are material for further research by those keen on financial inclusion and its cost. For instance, the company discovered that borrowing through equated-monthly instalments (EMIs) for high-end, large-screen televisions are a cover for un-banked persons to get a formal loan. The shopkeeper colludes with the borrower to create loan records for EMI payments, but no TV is sold. Instead, the borrower gets the cash and the shopkeeper a nice commission. While many borrowers diligently pay back their loans, some default. The trick is to minimise the risk on such loans. By matching income and social profiles of the borrowers, the company found that, often, when the customer was trying to buy an unusually large television, it represented a financing deal and could be weeded out. 
 
Another tiny scam that the company discovered was that borrowers tried to use the same know your customer (KYC) data with two different identities, and a minor misspelling of the name (Rajiv or Rajeev). This would, often, fly under the radar of the lending agency as a typographical error, allowing the person to avail two separate loans. A de-duplication effort, as well as a scan for past record flags such cases. 
 
A trick by those who have a previous loan default to avoid detection by credit bureau records is to apply for a new PAN card and submit it with fresh loan applications. The company had to develop a way to flag such cases through its algorithm. Their data analysis showed that a fresh PAN, obtained by people who were 45+, was a red flag. 
 
Yet another finding, that is being analysed, is the distance between the borrower and his place of work with that of the lending organisation. When a borrower sought out a lender, whose office was far away, it raised a red flag. The work being done by this finance company, and its success at keeping bad loans to the minimum, only proves that profit is the best driver of high-quality research, innovation, as well as risk-taking—something that will not be possible through case study contests or government-mandated programmes.
 

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COMMENTS

Anil Mattoo

11 months ago

Algo lending can act as a boon to bankers . Banks are flushed with NPA's in Govt sponsored schemes and same can be avoided using this tool,but same needs to be analysed .

Does Digital Currency have a bright Future?
Over the years, the RBI has changed its stance and now acknowledges possibilities for blockchain technology
 
On 24 December 2013, RBI officially warned the public about the potential financial, operational, legal, customer protection and security-related risks they are exposing themselves to by using virtual currencies such as Bitcoins. Specifically, it warned that transactions were on a peer-to-peer basis and there was no underlying backing for the digital currency, or central registry, nor any recourse, in case of disputes.
 
RBI took note of Bitcoins and their use, nearly five years after the crypto-currency was launched and because it was fast gaining ground through social media and Bitcoin exchanges. RBI’s warning had an immediate impact and the spread of Bitcoins slowed down considerably. Some exchanges also shut down. 
 
But, in December 2014, RBI governor, Dr Raghuram Rajan, indicated a change in stance. In a television interview, he said that digital currency was getting safer and, over time, could be an acceptable form of transaction. By December 2015, there has been a further change of heart at RBI, when its financial stability report said, “With its potential to fight counterfeiting, the ‘blockchain’ is likely to bring about a major transformation in the functioning of financial markets, collateral identification (land records for instance) and payments system.” This has caused a lot of excitement among Bitcoin enthusiasts around the world, since India’s large population and record of quick adaptation of technology makes it a fertile ground for the proliferation of this new currency. 
 
Technically, Bitcoins and crypto-currency can grow without any reference to the regulator. However, it is important to remember that RBI’s warning in 2013 triggered raids on a Bitcoin exchange. Anything that is not formally regulated in India faces the risk of harassment by investigation agencies and even a shut down, when regulators decide to take note of it or choose to disapprove. 
 
Blockchain technology is attracting the attention of global regulators because it is distributed ledger technology, which adds verified blocks of transactions and allows payment systems to operate in a decentralised way without the need for a centralised registry or ledger. This allows multiple entities to rely “on the same, shared, authenticated information and drastically reduce the cost of record keeping.”
 
Banks and financial companies, now, believe that the technology in various forms will transform financial sector architecture and offer a new way of trading financial instruments without the need for expensive central depositories that are also prone to cyber fraud. A complex process of validating transactions by globally distributed ‘miners’, adding blocks to a dispersed chain, makes it almost impossible to go back on a transaction, say experts. 
 
Major finance companies around the world are devoting significant resources to study the technology and its uses—and regulators are watching developments very closely to study the risks associated with the systems. One key issue is the scalability of the technology, if it is to be used for global financial transactions. What is certain is that the technology is evolving fast and companies such as Deloitte Consulting are predicting that 2016 will see the emergence of new uses of blockchain technology as various experiments and prototypes become a reality.
 
An article by David Wessel, posted on the Brookings.edu website, puts the hype and the hope that is built around this ‘disruptive’ technology in perspective. He says, “The evolving technology faces risks and obstacles. Some of these stem from the public impression of Bitcoin, a currency created with this new technology. These problems include hacking attacks on Bitcoin wallets, governance challenges, threats to consumer protection, money-laundering concerns, resistance from entrenched financial institutions and raised regulatory eyebrows. It could turn out to be an infant technology, one that most of us don’t yet understand, one that is about to change the world; think the Internet before browsers. Or it could fizzle out.” 

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COMMENTS

SATISH MADHAV

2 years ago

Central banks around the world do not like any competion to their power of being able to print money recklessly.Bitcoin was emerging as a big threat to that and so,the attempts to stifle it.Despite that,Bitcoin has somehow survived despite setbacks like the Mt.Gox collapse and the Silk Road scandal.If there is any change in the attitude of the central bankers toward crypto-currency,then it means that somehow they have been able to work out a mechanism which brings them under their control.

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