Loan Stacking and Blockchain

The phrase “loan stacking” generally means taking out multiple loans from various lenders in order to reach a financial goal. With the higher rise of NPAs and failure of major lending financial institutions, banks and fintech startups are very cautious and apprehensive in shielding these type of risk into the lending scenarios. At present, many traditional banks are continuing to partner with fintech. In all, about more than 80 percent of banks have entered into fintech partnerships, and will continue to do so to meet market needs of UPI and e-wallets related transactions. This gives rise to growing sophistication of fraudsters. Whether the threats come in the form of synthetic identity fraud, loan stacking or fraudulent financial documents, there are a growing number of costly scams that fintechs must develop processes to neutralize. Loan Staking is not the only option of raising more money. There are more appropriate alternate lending options available such as Additional Funding on payment of 50% of the debt outstanding, Refinancing of Loans etc.

According to a report published by BloombergQuint, digital lenders under the aegis of the Digital Lenders’ Association of India, are working on a blockchain-based ledger to keep a check on customers who are involved in loan stacking. The move is aimed at addressing the age-old problem of ‘loan stacking’ which happens when a borrower takes loans from several lenders within a short period of time. The platform is designed to work as a decentralised autonomous organisation which will take it away from the control of a select few lenders. After lenders sign themselves up on the platform, they will be governed by a set of rules in a smart contract. The contract will enable new lenders to enter the platform if they have 66% approval from existing lenders.

Blockchain naturally connects all parties on a system, so the customer would be linked directly to the lending institution, with full transparency and a real-time view of finances on an immutable ledger. This means there is much less need for due diligence which is very time consuming and expensive. If a bank had a full transaction history, with inflows and outflows, details of outstanding bills, and so on, then a lending decision becomes much easier. It could run a credit worthiness check algorithmically, speeding up the process significantly. Codified instructions generated by smart contracts can be extremely useful for reducing errors, fraud, automating the settlement process and digitising contracts. Efficiency would be improved, as managing the lending workflow is tedious and time consuming, but can be largely automated on the blockchain. It also allows safe permissioning of data visibility for auditors, regulators and investors, and secure transmission and storage of sensitive data. The benefits for banks of utilising blockchain tech are much the same as for individual loan providers, but perhaps even more useful for larger institutions, as they can streamline and optimise their operations.