It was a recurring deposit and fixed deposit scheme that seemed too good to be true: a promised yield of 13 percent annual interest (nearly twice the rate that established banks offered) and double the principal amount on maturity after five years. For 18 lakh people, mostly from the lower socio-economic strata, this was an attractive and hard-to-let-go-of proposition, and swayed by the claims, they invested all their life savings into the scheme. By now, you would have realised where this is headed since this is an oft-repeated story. Almost five years later, the investors realised that that they had been taken for a ride and put their faith in a Ponzi scheme.
Rating agency ICRA has predicted that the loan defaults by Indian companies are likely to inch higher in FY19 due to higher cost of borrowing and weak balance sheet strength. While the default rates increased to 3.4 per cent in FY18 from 2.6 per cent in FY17, given the extent of bank funding-related challenges that might adversely impact both the cost of borrowing as well as the liquidity profile, a further increase in loan defaults cannot be ruled out.
Both these reports are indicative of the challenges that continue to persist in the traditional financial system, despite the advances in technology.
Vicious and age-less challenges in the financial sector
Today, savings scheme offered by leading financial institutions are either subject to market fluctuations or are unattractive. At times, the returns on savings are negative, considering the ever increasing rates of inflation and depreciation. This gives scope for people to fall for so-called “attractive” investment schemes run by a number of unregulated companies.
On the other hand, the high incidence of defaults makes traditional financial systems wary of giving loans to small businesses and people from lower socio-economic strata. If and when they do get access to capital from unregulated lenders, it’s at humongous interest rates.
This vicious cycle has been continuing for decades, because “traditional financial systems like banks haven’t transformed to meet the financial needs of the people,” according to Amitesh Sahu, Co-founder of Union, a decentralised collective lending and savings marketplace platform.
He adds, “Yes, banking has gone digital and online, and banks are using cloud-based cognitive services to enhance digital experiences. But, apart from these superficial high-level transitions that have undoubtedly added a factor of convenience to regular banking / financial transaction experiences, there hasn’t been a focused effort to address core persistent challenges.”
The other persistent challenge is that of financial inclusion. Government intervention, emergence of fintech solutions and models and efforts by financial institutions to reach out to the unbanked, haven’t reaped the expected dividends. “This lag in bringing about financial inclusion continues to exist because of a dependence on archaic documentation and application processes,” believes Amitesh.
Considering that a sizeable chunk of this unbanked population lives in remote villages or on the outskirts of towns and cities, it is often not well-connected to financial institutions. Further, the complex documentation and application process at these institutions also keeps this segment at arms’ length from formal lending and borrowing channels.
With the increasing usage of smartphones and mobile internet, mobile banking is a viable option, but even there the jargon and complicated legal terms make it difficult for the unbanked population to understand the requirements and processes to get access to financial services from traditional organisations like banks.
Today, payment banks are targeting migrant labourers and low income households and helping them take a step into the formal banking system by offering low-cost savings accounts and domestic remittance services. But this solution doesn’t address the root cause of the challenge.
Why blockchain is a relevant and a tailor-made solution
According to Kamal Anandani, Co-founder – Union, one technology that has the ability to address these two core challenges and herald a new paradigm in financial transactions, especially in the Indian scenario, is blockchain.
“In blockchain, because of the use of cryptography, entire business models can be automated through the use of smart contacts. This eliminates a lot of overheads that occur in a traditional banking transaction. More importantly, because the data can is secured and verifiable, and with every participant in the transaction possessing a copy of past transactions, the risk of fraud is minimised greatly,” he explains.
Kamal says, “Even if you look at the PNB scam, it was because of the lack of data integration and transparency of processes in the core banking processes, which led to the misuse of the SWIFT interbank messaging system. With blockchain, it is next to impossible to tamper with the distributed ledger.”
In essence, he says, blockchain can make financial transactions fast, secure and transparent. “There is no scope for inconsistency in data integrity or non-transparency of data, which means that the possibility of mismanagement of funds leading to scams -- be it worth a few thousands or multi-billion dollars – can be reduced greatly.”
According to him, the next big advantage that blockchain brings is its ability to make financial inclusion a reality in India, because a blockchain transaction is simple and transparent and does not require the users to read between the lines. Also, there is no need to head to a physical branch or office because every single transaction happens online.
But, so far the usage of blockchain technology has been limited to high-end use cases such as cross-border open account trade finance and remittance transactions or multi-nodal blockchain transaction to digitise vendor financing, etc.
Creating a democratic and collaborative financial marketplace model
Amitesh, an MBA in Operations and Analytics (US) and a NIT alumni adept in blockchain, decentralised architecture, machine learning algorithms, and big data analytics, believes that the scope offered by blockchain to make financial transactions efficient, transparent and secure is immense. In fact, even traditional financial systems are now beginning to relax their norms and starting to tap the potential of this technology. This is encouraging new-age financial organisations like Union to take the lead in disrupting existing obsolete financial models.
Amitesh says, “Union connects borrowers and lenders in a trusted, fast, uncomplicated manner by leveraging Smart Contracts and blockchain. Using blockchain, Union incorporates trust and social capital into the lending and saving process, eliminating the need for mediators. The underlying blockchain records the transactions between parties and the KYC process ensures that the interests of both the parties – lenders and as well borrowers – are protected. This democratises saving and lending, and makes the access to capital faster.” He adds, “Financial transactions on blockchain are auditable, which adds the much-needed trust factor to a new-age solution.”
Union has developed a portfolio of financial products that leverage and integrate social capital and individual trust on blockchain technology to create a collaborative and democratic financial ecosystem. “While it may come across as a high-end solution, in fact the opposite is true. Union’s model becomes very relevant for the financially-illiterate, for the unbanked population and small businesses. There are no jargons or buzzwords, nor is there any fine print that needs to be read and re-read to understand the underlying implications. It’s a simple process where you create a savings group, invite friends or people you trust, save collectively, and use the money based on the group’s terms and conditions. And, because it is on blockchain, it can be automated, audited, and is tamper-proof. ”
Giving the reins to the people to manage their money
At a time when questions are being raised about the credibility of financial institutions, which were once considered custodians of integrity and had stringent process checks in place, will the common man be able to put his trust in new financial models like community-based saving and lending platforms?
According to Kamal, who has held senior roles at PwC and KPMG, “This gives people even more reasons to trust a platform where they are given control to manage their savings and lending and access capital and other financial products without an excessive chain of intermediaries.”
For more details visit https://getunion.io
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