Secured loans in the digital lending space are witnessing a lot of innovations. But thinking of cryptocurrencies as collateral forms for these loans is still a big question, one full of regulatory and practical concerns.
Loans Secured Against Bitcoins
If there is anything that has undergone a change, thanks to digital players in the BFSI space in India, it is – everything. Just pick lending and you can see how big data, social media weight, machine learning, etc. have made KYC (Know Your Customer) and credit-checks different. Add to that the use of APIs (Application Program Interfaces) and virtual elements for fast disbursement, and one can see why speed and ease are making digital loans stand apart.
So why not use cryptocurrency instead of gold or property to cushion a secured loan? Truly ‘digitize’ a loan? News.Bitcoin.com surveyed players in the industry, and there responses can be categorized as skeptical.
Abhi Upadhyay, a professional in the mobile lending space, dismisses the hope. “Traditional financial institutions like banks are never going to come close to accept cryptocurrency as security.”
But this ‘traditional’ legacy is exactly where and why challengers have started to win. Digital lenders have compellingly questioned deep-rooted processes and red tape in the lending industry in India by experimenting a lot, such as with the use of social media instead of old-school documentation for KYC and credibility checks. So why not bitcoin?
Regulation, Regulation, Regulation
Manav Jeet, Founder and CEO of Rubique, a prominent fintech player in the digital space, says the use of cryptocurrency as a collateral in the case of secured loans is a long shot. The biggest difference is the amount of regulation India posits in comparison to other regions. “We are the best regulated markets, and even in terms of awareness only a tiny portion of Indian population is using cryptocurrency. It will take a lot of time for us to get to the stage where we can imagine this form being used in secured loans,” Manav Jeet insisted.
For Piyush Kabra, VP, Finance at Lendingkart, warns the practical problems around encashing bitcoins and registration, again thanks to regulatory reasons, would be factorsas to why cryptocurrency will not work against a loan – not yet, at least.
The use of cryptocurrency in secured loans is a possibility if you ask Saurabh Shankar, head of marketing at Paysense, another digital lending disruptor in India, with data science behind its intent of serving mall-ticket loan segments as well. But he explains how collateral works. “It is an additional security measure for us when we lend to a customer. Any other form of collateral can be used as security for sure, so why not bitcoin? But the current regulatory environment is not exactly an incentive to consider such options. This may also need additional work. Crypto-to-crypto lending may not be too tricky but crypto-to-fiat would be a whole new space to reckon.”
Crypto and Loans – Not Mixing Yet
India is a changing market, but one that is still under-served when it comes to instant, flexible, and small loans for the middle class. Estimates show how digitized customer journeys chop the cost of processing to about 33% of the original cost. Plus, servicing costs is almost 1/10th that of physical channels when we look at digital channels. That’s not impossible to achieve when a player banks on technology to break the loan chain and to disaggregate lumps of delays that weigh down a usual lending process. Using behavioral analytics, cash flows, social media signals, and peer reports instead of legacy underwriting processes or income-tax returns – this is what many smart digital lenders started doing early on.
We are staring at a global fintech software and services sector of $45 billion by 2020 (from what NASSCOM reckons). Interestingly, India has exhibited the second highest fintech adoption rate (59% while the global average is 33%) as per the EY Fintech adoption index.
Globally, players like Biterest, Coinloan and Abic have started offering such loans that are secured against bitcoin. There we can see advantages like variety, speed, automation and no limits. It matters when there is no need of liquidation of an asset to get money out of it (the reason people use fixed deposits in secured loans). Then, there is the side of significant appreciation of value over time (which can be higher than loan interest). Also, concerns around forked cryptocurrencies have been addressed by many such players. After all, fungibility, preservation potential, and liquidity are true tests when it comes to how people think of money.
Yet, talk of cryptocurrency’s use in the BFSI space is full of hesitation and confusion, even for disruptors. Responses from other players like Innoviti and Capital Float could not be elicited. But as Saurabh pins it, conceptually the idea is not bad but the practical side here revolves around regulations and actual ease.
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