Major Indian banks have taken the initiative to build a common platform, based on the blockchain technology, to deal with the operations of lending to MSMEs (Micro Small and Medium Enterprises). Eleven banks – HDFC Bank, Kotak Mahindra Bank, ICICI Bank, Axis Bank, Yes Bank, RBL Bank, Standard Chartered Bank, South Indian Bank, IndusInd Bank, State Bank of India and Bank of Baroda have decided to collaborate on a blockchain platform to remove the communication hurdle (among them) and bring transparency in the financing of funds to the MSME sector.
In this regard, a consortium based in India called – Blockchain Infrastructure Company (BIC) is organizing the meetings among the participating banks. During these meetings, the participating banks send their representatives who discuss about the current challenges being faced while lending and recovering funds from the MSME sector, ways to tackle those issues through the blockchain platform and finally, take a stock of the progress made in the development of the blockchain platform.
According to Abhijeet Singh, head of business technology at ICICI bank, “The idea of having such an organization is to remove any communication hurdle among the different banks. A blockchain network can only thrive if the entire ecosystem is working in synergy through a single network. The core objective of having such a ledger-network is to ensure transparency in credit disbursement, especially in the underbanked section.”
The main motive behind this initiative is that the banks want to safeguard themselves against issuing loans to customers who are not credible. In the recent years, the Indian banks (specifically the public sector banks) have been rocked with many scandals and a huge stock of Non-Performing Assets. Some of the big corporate houses have defaulted on their loans and some even turned into wilful defaulters. All of these had badly affected the balance sheet of most of the Indian banks forcing the Reserve Bank of India (RBI) to initiate the Prompt Corrective Action (PCA) among the worst affected and freeze their lending powers. Even the government had to intervene and infuse funds into the public sector banks, from the taxpayer’s money, to prop them up.
The Indian banks fell into this mess as they had no proper system to communicate with each other and have a credit worthiness record of their clients that is updated on a regular basis. However, the blockchain based common platform will eliminate this shortcoming. In a blockchain platform, any transaction once recorded becomes embedded in the system and cannot be altered. This brings a level of transparency in the transactions and helps to keep a record of all the transactions from the source of their origin. Thus, the banks will be able to update the records of their clients on a regular basis with regards to their loan repayment and check their credit rating accordingly once this blockchain based platform is deployed.
The banks have decided to give special emphasis to the MSME sector because as per the records of the Reserve Bank of India (RBI), the outstanding loans of all the commercial banks with the MSMEs as a percentage of the entire pending corporate loans with them is a mere 17.3 percent. That is, there is a clear shortcoming in the credit penetration for the MSME sector.
This can be described as the first positive step undertaken by the majority of Indian banks to implement the blockchain technology in their system for improving the efficiency of their operations. Before that, the Indian banks were continuously scrutinizing the cryptocurrency-based transactions of their customers following the July 2018 notification of the Reserve Bank of India. In some cases, the banks had even closed the accounts of some of their customers after spying the traces of their transactions to the crypto exchanges. Nevertheless, the banks are slowly opening their eyes to the effective real world use of the blockchain technology.