Just a short writeup on my thoughts about how blockchain technology is going to have impact on lending/credit domain in medium to long term. Kindly email me -vinkar.shan@gmail.com or Call on +91-7032409664 for any queries.

1. Blockchain: Impact on Lending in Indian Context
Blockchain and crypto currency is the buzzword now, but, it is important to assess if blockchain going to
have real disruptive effect on current financial ecosystem and introduce efficiency in existing processes.
In this quest, I started exploring the technology and since I come from Banking, specifically, Small &
Medium enterprises lending domain, I shall restrict myself to applications/ideas aimed at disrupting
lending and credit underwriting process. The approach is to, highlight the development in Blockchain
technology, smart contract use, crypto currency economy, and its likely impact on traditional finance,
along with area of concern in its wide adoption. By disruption I mean substantial reduction in cost of
borrowing, new product availability for a particular segment, efficiency gain, elimination of intermediary
and reduction in turnaround time. Also, time horizon taken is 3 to 20 years for the disruptive effective to
be visible on ground. (Please don’t consider it as investment advice for few of the startups I mention, and
I only intend to highlight their technology and likely impact).
1. Collateral tokenization
Simplest way to define tokenization in context of blockchain is to bring the real world assets on
digital platform. In past assets like shares, fiat currency has been dematerialized and digitized.
With emergence of blockchain technology, for the first time, real estate property, art, Gold can
be tokenized, owned and transferred from one person to other in digital world. These assets are
non-fungible nature. The immutable characteristic of blockchain technology also helps
safeguarding the ownership of assets and provide details of past ownership track record. ERC-
271 tokens on Ethereum blockchain can be one example of such assets representation on public
blockchain.
Tokenization of assets when combined with smart contract can be used not only for assets backed
lending by banks, but also help domestic p2p lending market to explode. It can be further used
for fund raising for new real assets and enable micro ownership. Few blockchain startups like
Atlant, BrickBlock, LAtoken, Digix are targeting Few of state governments like AP has taken lead
in property registration on blockchain on trial basis.
Disruptive effect-Currently when asset is to be provided as collateral for collateralized lending,
banks go for legal vetting so as to check and verify the assets ownership. Details like sale deed,
tax deed, tax paid receipt, encumbrance certificate, plan approval copy are checked to
authenticate for clear marketable title. Incomplete or partial information leads to lower valuation
of property or non-acceptance of collateral. With real estate assets moving to blockchain, the
immutability and chain record of asset transfer from one person to other helps in assessing clear
legal ownership, provides efficiency gain and reduce the TAT from current 7-12 days to few hours.
Also,anempaneled valuers appointed by bank goes to inspect the property, and find the valuation
of property. With tokenization of assets on blockchain, the valuation can be ascertained in real
time by comparing the property database in nearby areas and inspection may be required in few
specific/complicated cases. Again, this will provide better valuation of property for seller and
informed purchase decision by buyer and availability of higher funding for borrower due to
increased valuation.

2. Concerns- Necessary state legislation will be required to provide legal validity to such transaction
so that smart contract and assets tokenization stands in local court of law, enforceability being
the end objective. The real estate market being highly dispute prone, the initial data being put up
on the blockchain requires to thoroughly validated. For the system to work seamless in real time,
other statutory data bases, like property tax database would be required.
2. Working capital/Term loan/ consumer loans- Working capital is commonly borrowed
banking product, availed to meet liquidity gap, on account of delay in payment to be received
from customer , while the business needs cash for its raw material purchase & labour salary to be
paid to meet next order. Another product like Term Loan/consumer loan, is required to be paid
for capital expenditure in case of business and consumer loan in case of retail segment. Final
interest rate to end customer depends on multiple factors like cost of fund paid to depositor,
asset quality behavior, and profit margin of banks. The interest rate varies from 10-14% p.a. in
case of loan in INR currency for business loan and personal loan in range of 12-18% p.a.
With advent of blockchain based decentralized P2P global lending platforms like Ethlend, Fintrux,
Lendoit, Ripio Credit Network, invoice financing platform Populous, the lender and borrower can
enter into mutually agreed terms on Libor linked interest rate, flexible payment schedule, and
collateral terms. The loans are mostly in crypto currency and few like Salt in Fiat currency. The
crypto currency loan can be converted in Fiat currency by using exchanges.
Each of these platforms have different ways of addressing credit risk. Few methods are like
collateral coverage of 120-150%, creating collateralization pool wherein each borrower pays
certain amount like 2-5% of loan availed as collateralization reserve, and lenders are paid out from
the collateral pool in case of default. It is similar to insurance product wherein, assumption is, only
a few loans will go default. Another method is bringing a co-signer from the same country location
as that of borrower. Cosigner knows the local legal framework, and can act as guarantor on behalf
of borrower. There is a startup called Bloom, working to emerge as global credit bureau on
distributed platform, with enhanced security and trying to act as bridge between traditional and
crypto world. Bloom score can also be used for p2p global lending.
In traditional world, Banks would act as intermediary and undertake credit risk, avail libor linked
deposits from its depositors, and, lend to its borrowers at prevailing rupee interest rate and
charge for hedging cost and take credit risk on its balance sheet. In the blockchain world, partial
credit risk is taken by lender directly, or guarantor. The crypto currency volatility risk held is taken
as per the mutual agreement of borrower & lender.
Disruptive effect- There is possibility of reduction in cost of borrowing down from current base
rate linked 12-18% to Libor linked 7-8 % even lower than SBI base rate.!!. Never before has there
been possibility of providing such lower interest rate to small micro borrowers or consumer
segment. Traditionally mid corporate and corporate companies has been availing such loans in
form external commercial borrowing, foreign currency loans and foreign currency bond issuance.

3. With advent of blockchain technology and crypto currency, low cost loan with lower transaction
cost can be availed by SME and consumer loan borrower.
Concerns- Only a few of the startups have full built in products with relevant traction and none
have reached stage of stability, hence robustness of underwriting practices, behavior pattern of
participants ie borrower, underwriter, guarantor during stress is not known. Also, since it involves
cross border movement of funds, the related legal framework like anti money laundering, Foreign
exchange Management Act, Payment & settlement act and regulatory guidelines from RBI,
Finance ministry, or SEBI is not known and big risk to this type of lending.
3. Bank Guarantee- Traditionally, bank guarantee as product is required when a task is being
outsourced to a contractor, it is required to assess financial strength of bidder before contract
being awarded. Other usage is post completion of project work, performance guarantee is
required upto the value of around 5-10% of project cost to be provided by contractor as guarantee
for project to meet operational parameter. Here the outsourced agency gets bank guarantee
issued on their behalf to outsourcing agency (Principal) by their bank without deposit of initial
bidding amount. In case of default by outsourced entity, the principle gets money directly from
the bank, no questions asked. For banks, its part of their regular business model to take credit risk
and issue bank guarantee in leu of fees.
In context of blockchain, the smart contract can be utilized to provide the same products by banks
to their customer at public blockchain platform or permissioned blockchain. The terms of bidding
are encoded into smart contract and in case of invocation or default the money gets automatically
transferred to the principal. The satisfaction of terms can be encoded using the oraclize feature
of smart contract and only authorized person with permissioned authenticity can enter the
details.
Disruptive effect- In terms of benefit, the process will move from paper based to digital platform.
It will enable higher business efficiency with real time notification to all stakeholders. Since it will
be on immutable blockchain platform, terms & conditions cannot be tempered with or changed
only with consent of all the permissioned entities.
Bank guarantee facility using smart contract is independent of currency being used, hence the not
limited to crypto currency only. It also removes the inefficiency in terms of cross border bidding
on contract. Currently for any global tender to be bid, the bidding agency needs to provide bank
guarantee only from recognized bank or the bidder’s bank should have correspondent
arrangement with other globally recognized bank. With use of smart contract, only the amount in
terms of required currency kept into contract address is important and all the stakeholders can
mutually decide upon smart contract being used. Trust is replaced by code.
Concerns – The operational parameters being encoded or oraclize for input value can be
subjective. Also in scenario of change in scope, there may requirement for modification in terms
of invocation or recall, this may difficult in public blockchain. Also, in case of cross border bidding,
the issue or regulatory and statutory compliance may appear.

4. 4. Letter of credit- LC being the often used product for global trade with banks of exporter and
importer acting as trusted agents in the transaction. Whenever importer wants to import goods
from across other country, there is issue of trust, wherein even if exporter may agree to export
products, but what is guarantee that goods will be received post payment of money, also there
how to monitor quality of product. On the other hand, for exporter, there is risk of non payment,
wherein products are shipped, but the importer may not make good the payment. In order to
facilitate, the banks of respective parties act as trusted agents to facilitate trade transactions. On
request of exporter, his bank issues LC inname of importer. Post LC issuance, all trade transactions
documents, bill of lading documents, quality certification documents ,are routed by exporter
through his bank to importer’s bank. Post receipt of documents from exporter, importer then
reclaims goods at customs, payment is done by importer bank to exporter’s bank and eventually
to exporter.
In current setup, there are multiple parties dispersed across geographies, in different time zones
like, exporters, importer, exporter’s bank, importer’s bank, correspondent banks, quality
certification agencies, logistic agents, insurance companies, Cargo moving ship, customs offices
of respective countries, material supplier in case of merchant sale etc. Involvement of multiple
parties, with physical movement of papers and goods result into multiple inefficiencies cropping
up and unnecessary delay.
Permissioned blockchain platform with trusted nodes can serve as alternative solution to current
facility. Each of these participants from across the world can be registered as trusted nodes,
authenticating, auditing & verifying the goods movement with help of Internet of things
technology and GPS updation. The requirement of physical transfer of documents can be l
completely eliminated and provides the real time tracking of the transaction which can be trusted
and is immutable, visible to all stakeholders. A smart contract can be deployed , with input from
each of players, or oraclize real time data using API into smart contract for its execution.
Disruptive effect : Removes the use of paper based verification and related in-efficiencies like
typo, spelling mistake, etc. It also enables real time online tracking of goods by stakeholders. With
supply chain automation, and increasing use of sensors, humungous data produced in
international trade will enable all the players in real time decision making, design of suitable
products by insurance and banks, and efficient co-ordination among players. Blockchain projects
like cross border payment solution provider -stellar, trade finance solution providers in African
Market – Kommerce , internet of things focused - IOTA , lending platforms etc when used together
in context of international trade finance can have disruptive effect, even to the extent of
eliminating big monolithic banks from the entire process.
Concerns : Multi stakeholder being involved in process and sudden change in their behavior and
mindset is likely to take time. Each players coming from different industry have their own data
requirements, operate under varying legal and regulatory framework and standardization is only
possible when an international association and governments come together towards
implementing the same. Different blockchain projects dependence also results into possible
delay.