Copying from my last article that it
is again a lengthy article to refer. Stay patient and read it through at your
own pace!
In my previous article we discussed
about Bharat QR vs UPI and saw what's better in today’s scenario. Today, I will
emphasize on the innovation tried in UPI. Yes, you read it right while
considering this to be industry's first so far!
It is recommended for readers new to
UPI should visit the NPCI page in the below appended link for a base knowhow
about UPI.
Product proposition:
Digital lending has been the talk of
the town for the recent few years in easy processing of loans to the
individuals/businesses. The solution is a remedy to the long que/strenuous
process in the lenders’ premises with a hell lot of paperwork and disbursement
process. Customers’ feedback turned out to be jovial for the Financial
Institutions (FIs) facilitation as anyone can sign-up for a loan and get it
processed on their handheld devices through the FIs application with barely any
paperwork with an easy disbursement. Well, the customers’ satisfaction at a
level brings about cheers to the FIs.
However, what about the credit
collection a.k.a loan repayment scenes? Let us figure out the modes for loan
repayment:
Ø
NACH/SI – As discussed about it in the previous article.
Ø
BBPS – After the recent allowance of RBI on the inclusion of
other biller categories apart from five other segments (DTH, Electricity,
Water, Gas & Telecom), Various FIs have included themselves as a biller
through different payment aggregators as well as direct engagement with NPCI on
BBPS for the loan repayment facility through Debit card, Net banking
facilities.
Ø
Collection
agents -- this practice is widely being
followed by many FIs even at today’s date wherein mostly PSL (priority Sector
Lending) is a portion to the total assets value. Collection agents appointed by
the FIs undertake the task of loan installment collection from these groups
through cash either on a daily/weekly/monthly/agreed period.
So, what's the ongoing issue in the
above repayment modes?
With the financial inclusion gyan by
experts all over, this becomes obvious that the growing economy in terms of MSMEs
and individuals knowledgeable enough to fulfil their requirements, the colossal
rural and semi-urban population, who although is into small ticket size loans,
contribute a major chunk in any asset books of FIs. Usability of smartphones
with the penetration of internet to every nook and corner has facilitated the
customers with the convenience to make transactions at their fingers tip
anytime and anywhere they want. The biggest ever innovation in the payment
industry, i.e. UPI has made it possible in making the country digitally
inclusive. UPI as a payment mode has been witnessing transaction volume of more
than 9 billion with its massive adoption rate.
*Disclaimer- I am not delving into
statistical numbers of the internet & smartphone penetration or even the
adoption rate of UPI, which can be easily found in multiple research papers
online. However, mentioning one of the links, which can be found useful for
reference:
Having worked in one of the leading
Small Finance Bank, wherein PSL extends to at least 75% of the ANBC (Adjusted
Net Bank Credit), and cash collection by the agent on their assigned
geographical locations is a preferred method to collect the installments from
their group of customers. The average cost borne for more than 3000 agents on a
daily basis is somewhere between 70-80 INR which affect a sizeable extent to
the Asset book size.
The cost can be imagined to be
exorbitantly high for small scale FIs. To do away with this malady, An
innovative solution was thought of allowing the customers to repay their loans
by scanning the QR code through any of their UPI PSP applications. This
solution would not only serve the purpose of going complete cashless for the
loan repayment, but also a cost effective solutions for the lenders to collect
money on a real time with barely any hassles.
The Detailed solution:
There are certain caveats to think
of the solution as NPCI, the regulatory body is above your head. What are the
necessities to launch the solution?
ØThe FI need to have registered as a
member bank to NPCI for UPI 2.0
ØThe FI need to have completed issuer
certification of UPI 2.0
ØThe FI need to have completed the
Acquirer certification which is inclusive of having its own UPI handler
<xxxxx.upi@blablaFI> and PSP of UPI 2.0
Here is a self-explanatory customer
journey on the assisted/self-generation of the QR code for loan repayment both
through the web portal/application:
Please note that I am
not considering about the transaction fee, switching fee. Also, having said
that the proposition to be industry's first, NPCI is yet to set up a MCC
(Merchant Category Code) separately unlike other merchant type payments. Hence,
the fees currently is as per the normal UPI transaction fee. Let us now have a
glance at the functional journey:
ØCustomer visits the web
portal/application
ØCustomer enters his/her
loan account number
ØLoan a/c details fetched
from the CBS/LMS (Loan Management System) to the frontend channel. Fields in
API:
- Name of the customer
- Name of loan product
- Live account status (Active/Inactive)
- EMI due amount
- EMI due date
Ø
Customer verifies and
proceeds to the next page with a QR code displayed to him/her. The QR code is
generated by the UPI switch which comprises of VPA having customer's loan
account number fetched from the CBS/LMS with an API (Namely as Get Account Details
API) offline.
ØThe customer is
facilitated with view/download option of the QR code for him/her to make
payment from any UPI enabled PSP app.
ØOnce the payment is made
by the customer through any of his/her linked bank accounts in his/her UPI PSP
app, the customer’s issuer bank debits the particular sum paid for installment
from the customer’s bank account and sends the message to NPCI. NPCI in turn
communicates the same to the beneficiary bank’s UPI switch (The bank in which
the customer holds his loan account).
ØNow, the UPI Switch
communicates the same to the Bank's CBS through the middleware with the credit
message. A pool (settlement) account is created in the CBS in which all the
loan repayments made by the customer with the list of payments details and the
VPA (Virtual Payment Address) reside. Basis the Loan account number as a unique
reference, CBS will debit the pool (settlement) account and the credit to the
respective customers’ loan account.
ØThe entire game is on
real time. The customer will also get an instant SMS/email notification for the
credit made by him/her in their beneficiary bank's loan account.
Reconciliation and
Settlement:
Recon and settlement is
as per the usual practice of T+1 wherein ‘T’ is the transaction date. Files
used for recon are:
- The pool (Settlement) GL report
- The UPI Switch report with only the loan transactions
Transaction failures:
Failure in the
transaction can be like, customers’ issuer bank account was debited and their
beneficiary bank loan account was not credited. In such cases, if the
transaction has passed through NPCI’s leg and the message has reached the
beneficiary bank’s UPI switch, the recon and settlement on T+1 would solve the
issue and the customer’s beneficiary bank loan account would get credited.
If the transaction has
reached NPCI’s leg but has failed to reach the beneficiary bank’s UPI switch,
in such cases, NPCI would send a failure message to the customer’s issuer bank
and the source (linked) bank account of the customer, which was debited, will
be reversed with the same amount.
Possible risks and their
mitigation approach:
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Risks
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Mitigation approach
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Now, what if any
NBFC/MFI/FIs do not have their own UPI handler, i.e. they aren’t the member for
UPI with NPCI?
Well, that's not an
issue! All the FIs need to go hand in hand to drive the digital financial
journey. However, that comes at a cost which depends on the
commercials/agreement amongst them. In this cases, the member bank to NPCI who
has its own UPI solution can lease its solution to other FIs. Let us understand
with a scenario.
Consider “OMG Finance”
is a MFI (Lender institution) which lends small ticket size loans of up to
1Lacs INR to its customers. It has been collecting the installments from its
customers through its collection agents who would visit their customers periodically
say daily/weekly/whatsoever, and collect the installments in cash and deposit
it with their lender. Later the lender credits to the loan account of the
customers with the installments received from them in their underlying loan
account created in the MFI’s LMS (Loan Management System).
Consider, Dixon Bank is
a member bank to NPCI who owns an UPI handler and it has already facilitated
its customers for loan repayment through UPI. Upon the agreement between OMG
Finance and Dixon Bank, OMG Finance has entered into a contract to use the UPI
solution of Dixon Bank for facilitating its customers for loan repayment on an
agreed commercial.
Ø With the contract between OMG Finance and Dixon Bank, say OMG Finance agreed with the VPA format as <loan account number.OMGFIN@Dixonbank>.
Ø OMG Finance would share an API with Dixon Bank’s UPI Switch which consists of the valid and active loan account number, name of the customer, mobile number, email, or any other parameters as agreed upon by the parties.
Ø The customer uses OMG Finance App to generate his loan repayment QR code. Thus, he enters his/her loan account number.
Ø OMG Finance LMS fetches the loan account details such as name of the customer, loan product name (Housing/personal/etc.), EMI due amount, EMI due date, etc. and displays it to the frontend channel.
Ø The customer upon verifying the loan account details fetched, agrees to the t&c laid down by OMG Finance and proceeds to generate his/her QR code.
Ø OMG Finance App displays the unique QR code as fetched from Dixon Bank’s UPI Switch through an API. The dynamic QR code is a combination of customer’s loan account number + customer name. However, it is static to respective customers for using it to scan multiple times.
Ø The customer can verify the QR code with the name and loan account number displayed on the QR code page and view/download for it to scan and make payment.
Steps in the funds flow:
Ø
Customer uses any UPI PSP app and
scans the QR code/enters the VPA for making the payment from his linked bank
account.
Ø
The customer’s linked bank account
in the UPI PSP app gets debited with the amount attempted for payment.
Ø
The message is communicated to NPCI.
Ø
NPCI communicates the same to Dixon
Bank’s UPI Switch with a credit message.
Ø
OMG Finance would have opened a
settlement account with Dixon Bank.
Ø
Dixon Bank’s UPI Switch basis the
VPA, communicates Dixon Bank’s CBS via API to credit the total fund in OMG
Finance account.
Ø
Dixon Bank credits the total
detailed funds to OMG Finance settlement account.
Ø
OMG Finance to then debit the funds
in its settlement account and credit to the individual customers’ loan account
in LMS.
Ø
OMG Finance would send success
notification to the customer via SMS/email for the successful credit in his/her
loan account and the total updated due amount.
Ø
Customer is also able to view the
transaction details in the OMF Finance frontend app.
Reconciliation and Settlement:
For any failure of transactions,
wherein customer’s linked account has been debited and the loan account fails
to have been credited, if the transaction has failed to reach Dixon Bank’s UPI
Switch from NPCI. The customer would be reversed with the installment amount
paid in his/her source linked bank account in the UPI PSP app with the decline
message from NPCI to the customer’s issuer bank (linked bank account) at most
by T+1 day.
If the message from NPCI has reached
Dixon Bank’s UPI Switch, upon reconciliation at Dixon Bank’s end, the disputed
amount will be credited to the OMG Finance’s settlement account with Dixon
Bank. OMG Finance would then credit the customer’s loan account followed by a
successful credit notification through SMS/email.
Now that we understood the nuances
of the loan repayment through UPI, let us understand the underlying risks and
the mitigation approach:
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Probable issues
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Resolution approach
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So what’s the way ahead?
UPI recurring payments with a cap of
INR 2000 per transaction is still at halt from NPCI’s end. With the regulation
been passed, Customers can set the mandate in their respective UPI PSP apps
which will debit their linked bank account and credit their loan account
without the need to intervene and make payment every time. Well, we can only
have our fingers crossed as of now to wait for the game changing moment in the
credit collection business.
Thanks a lot for bearing the
article. Do post your comments for any clarification and share it with fellow
PMs seeking job in the relevant domain/working as a PM on UPI.
I shall come up with some other
useful and relevant insights in the upcoming article.
At last, the least I could do is
mentioning them in the credits to my article as a token of gratitude:
Mr. Debdoot Banerjee (You can check
him on LinkedIn here: https://in.linkedin.com/in/debdoot-banerjee-25b5452 ),
Mr. Santosh Mohanty (You can check him on LinkedIn here: https://in.linkedin.com/in/mohantysantosh)
and Shankar Nataraj (He is missing on Linkedin), who were my supervisors a.k.a
mentors in my previous organization and it’s due to their extensive mentorship
and support that helped in the implementation of the solution.