ULI vs UPI: Navigating the Challenges of Streamlining Lending in India

There’s much buzz around the Unified Lending Interface (ULI) recently introduced by the RBI, and given my current engagement in the digital lending transformation at one of the largest PSUs, I can offer key insights into ULI’s role, challenges, and future prospects.

The ULI holds the potential to reshape India’s lending ecosystem. However, achieving the same widespread success as UPI will present unique challenges due to the intricate nature of lending, as well as the significant reliance on multiple third-party service providers.

Here’s an in-depth look at ULI’s prospects, its dependencies, and the factors that will influence its trajectory compared to UPI.

What Made UPI So Successful?

 1. Addressing a Universal Need: UPI simplified payments for a wide range of users, from individuals to businesses, making it accessible for daily transactions of any amount.

2. Open and Flexible Architecture: UPI’s open API structure allowed third-party developers like Google Pay, PhonePe, and Paytm to build user-friendly apps, driving rapid adoption.

3. Strong Government and Regulatory Backing: UPI benefited from government initiatives like demonetization and the Digital India campaign, encouraging digital payments at scale.

4. Network Effect: As more users, merchants, and institutions adopted UPI, its value increased exponentially, creating a positive feedback loop that led to its widespread use.

ULI's Goals and Key Dependencies

Unlike UPI, which streamlined payments, ULI aims to simplify the loan origination and underwriting process, but this comes with far more complexity. ULI will depend heavily on integrating various third-party data sources necessary for effective credit underwriting. Some key dependencies include:

1. Fragmented Land Records: Many loans, especially those involving real estate as collateral, require access to state-managed land records. However, these records are often fragmented and inconsistently maintained across different states. Standardizing and digitizing these records will be crucial for ULI’s success.

2. Credit Bureaus: Reliable access to credit scores from bureaus like CIBIL, Equifax, and others will be central to determining borrower creditworthiness. Given the multiple providers in this space, ensuring smooth integration and consistency will be a challenge.

3. KYC Infrastructure: A seamless e-KYC system, primarily based on Aadhaar, will be critical for ULI. KYC processes ensure the verification of borrowers’ identities but must operate in real-time to support fast loan approvals.

4. Udyam Registration: For MSME loans, access to the Udyam database will be essential. However, discrepancies in state-level integration may pose obstacles to smooth functioning within the ULI framework.

5. GTIN Data: For loans related to supply chains, Global Trade Item Numbers (GTIN) play an important role in identifying products. Ensuring reliable access to this data could prove critical, especially for business loans.

6. Income Tax Records: Access to accurate tax filing records through the Income Tax Department will be necessary for underwriting both personal and business loans. Proper coordination with tax authorities will be essential to create a unified, real-time system.

7. Bank Statement Formats: Currently, there’s no standardized format for bank statements across financial institutions, complicating the financial assessment of borrowers. ULI will need to push for standardization to ensure efficient data flow and analysis.

8. Account Aggregator Framework: The Account Aggregator model consolidates financial information from multiple sources. ULI will rely on this system to gather necessary financial data for underwriting decisions, further highlighting the importance of streamlined third-party services.

9. GSTIN Data: GSTIN , when integrated with ULI become a powerful tool for enabling faster, more transparent, and data driven lending decisions. By tapping in to a business's GST compliance and financial data, lenders can better asses credit risk, reduce fraud, and offer credit to a broader range of borrowers without collateral, particularly MSMEs. Current Integration of GSTIN through RBIH has many operational challenges which needs to be addressed and need to make it real time data exchange.

RBIH's Role as a Super Aggregator

The Reserve Bank Innovation Hub (RBIH) will act as a super aggregator under ULI, consolidating data from various third-party providers and funneling it to banks. This makes RBIH the central hub for accessing essential information like land records, credit scores, tax filings, and bank statements.

- Bank-Customer Interaction: Customers will approach banks to apply for loans, and banks will, in turn, connect to RBIH via ULI. RBIH will then gather all the necessary data points from various providers, delivering them to the banks to assess loan eligibility and risk.

- Challenges with RBIH: Currently, the services provided by RBIH face certain operational inefficiencies, which means ULI will require significant improvements in these areas before it can offer the same level of seamless experience that UPI provides. Ensuring smooth and consistent service delivery will be key for ULI’s success.

Barriers to ULI Achieving UPI-Level Success

1. Inherent Complexity of Lending:

 Lending is more complex than payments, with various levels of risk and regulatory requirements. Each loan application demands comprehensive underwriting, involving real-time access to third-party data on a scale far greater than simple payment validation. This introduces challenges around standardization and speed.

2. Fragmented Ecosystem: Unlike the payment space, which UPI helped unify, the lending ecosystem remains fragmented with state-level land records, multiple credit bureaus, and disparate banking standards. To make ULI efficient, all these stakeholders must be tightly integrated.

3. Niche Market vs. Mass Appeal: UPI succeeded due to its universal applicability for payments, from small to large amounts, making it a product for the masses. Lending, by contrast, is more specialized—only a fraction of the population seeks loans regularly. This inherently limits ULI’s potential transaction volume compared to UPI.

4. Potential for an Open API Ecosystem: One of UPI’s key strengths was its open API framework, which allowed new players to enter the digital payment market, fostering competition and innovation. If ULI adopts a similar open API structure, we could see the rise of innovative digital lenders, much like the payment giants (Paytm, PhonePe, Google Pay) in the payment space.

Long-Term Prospects and Path to Success

While UPI rapidly became a mainstream tool due to the simplicity and frequency of payments, ULI is expected to take more time to mature due to the intricate dependencies on multiple service providers and the complexity of the lending process. The success of ULI will depend on several key factors:

- Seamless Integration with Third-Party Data Providers: Ensuring efficient, real-time access to critical data sources like credit bureaus, land records, and KYC databases will be crucial. Delays or inefficiencies in these areas could slow down adoption.

- Standardization Across States and Institutions: Addressing the fragmented nature of various data sources, such as state land records or differing bank statement formats, will be a major hurdle. A standardized approach across states and financial institutions is necessary for ULI to work smoothly.

- Government and Industry Support: Just as UPI’s success was aided by regulatory support and incentives, ULI will require strong backing from both the government and industry. Banks, fintech companies, and regulators will need to collaborate closely to drive adoption and innovation.

- New Digital Lending Players: If ULI adopts an open API model like UPI, we could see the entry of new digital lending platforms, leading to greater innovation and competition in the lending space. This could boost adoption, especially among MSMEs and underserved segments.

Verdict

In summary, ULI has the potential to transform the lending landscape in India, but its success will be more gradual compared to UPI due to the inherent complexity of lending and the fragmented infrastructure it depends on. While it may not match UPI’s transaction volume, ULI could revolutionize access to credit, especially for MSMEs and underserved individuals, if the necessary regulatory, technological, and operational improvements are made. With RBIH acting as a super aggregator and the potential for an open API ecosystem, ULI could eventually foster a new wave of digital lending innovation, much like UPI did for payments. However, achieving UPI-like scale will take time, and it will depend on overcoming significant hurdles in terms of data integration, standardization, and service efficiency.

#UPI #ULI #RBI #RBIH #DigitalLending #Digitaltransformation