A blockchain-based solution designed to help Indian banks and non-banking financial companies do their know your customer diligence of corporate borrowers, evaluate corporate lending risk, and manage vendors is ready to be deployed by the year-end.

The solution has been developed by Bankchain, a 30-member consortium led by the State Bank of India or SBI, the country’s largest lender, and includes banks, NBFCs and the National Payments Corporation of India (NPCI), an organisation set up by Indian banks to support retail payments.

“We are now testing the beta of the product and by middle of this month or within this year, we will be actually launching the smart contract system using blockchain,” Sudin Baraokar, SBI’s head of innovation, told FactorDaily.

Blockchain is a decentralised distributed digital ledger collectively maintained by a network of computers, called nodes. Think of it as a large record book shared among many people. What makes the blockchain secure is that no data can be modified by one person without everyone else who maintains the records agreeing to the change. Also, the record book is not stored in one place ensuring that there is no single point – as in the case of centralised database – using which records can be tampered with. This makes blockchain virtually unhackable and secure.

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The code for Bankchain’s permissioned blockchain solution, called Clearchain, that’s being developed by Pune blockchain solutions provider Primechain Technologies will be available for banks to customise.

Members of the Bankchain consortium include ICICI Bank, Bank of Baroda, Axis Bank, Kotak Mahindra Bank, YES Bank, among others; NBFCs such as Riviera Investors; government agencies Clearing Corporation of India Ltd and Export-Import Bank of India; and technology companies such as Intel.

Baraokar said deployments will be initially non-financial in nature because the consortium wants to test the platform thoroughly before moving to financial use cases.

“If we go into something like a home loan agreement and then try to smart contract that, it obviously has a legal impact as well as a financial impact to the bank. So, we are right now avoiding such use cases,” said Baraokar. “Once we have the system established, then we will also go to the regulators and authorities with our implementations and work with them for further implementing this on use cases that might have a financial or regulatory impact.”

Corporate risk profiling

The Bankchain consortium is studying various data privacy laws for the banks to be able to share data, added Baraokar.

YES Bank is also testing some of blockchain-based solutions, its chief information officer said. “We are testing KYC and Secured Documents Approval workflow as a part of the Project ClearChain that aims at sharing information of customers between banks for better fraud detection and to avoid process delays, so better service is provided to the end consumer,” said the bank’s CIO Anup Purohit.

The focus of the blockchain-based solutions will be on corporate customers, Baraokar clarified. “We are not doing the KYC of an individual. What the banks are going to do is to share KYC on the corporate side they generate with other banks,” said Baraokar.

According to him, the KYC implementation will involve creating risk profiles for corporate customers, collating other data sets – such as suspicious transactions – that are currently not being shared by banks, and sharing this information on a blockchain with other banks in the group.

“This will be very beneficial in terms of checking for anti-money laundering and suspected fraudulent transactions… it would make it much easier for the banks to take note of it,” said Baraokar, adding KYC would not be fully moved on to the blockchain solution immediately. “For now, the KYC won’t be a full implementation… it will be only for some of the data that can be accessed and shared. The system can be later iterated for more features.”

To be sure, banks today have access to credit rating and financial data of their clients but much of it is in silos and not always shared among banks. The idea behind the blockchain solution is to develop a shared repository.

“Success of a credit risk system like this will depend on the number of institutions involved and how much data is shared between them. This can help in decision making but in credit assessments there are many other subjective factors like unstructured data to make these decisions,” said Kaushal Sampat, a credit information veteran and formerly the president and managing director of Dun & Bradstreet India, a provider of data and analytics for businesses.

Instances of blockchain elsewhere

Bankchain is the not the only other instance of blockchain implementation by banks in India.

YES Bank has implemented a blockchain-based solution for consumer electricals company Bajaj Electricals for supply chain management in January 2017. Before the solution was implemented, Bajaj Electricals used to take 90 days to process invoice acceptance and payment to vendors. The vendors then used to apply for financing with their respective banks to process the payment.

“The to and fro of invoices, paper work and the subsequent paper trail was a time-consuming process involving rigorous due diligence,” says Purohit. “We introduced the blockchain technology for vendor financing through which Bajaj Electricals, their vendors and YES Bank would now be a part of the same platform and access real-time information on financing.” Result: an improvement in process speeds and productivity of all stakeholders.

According to Purohit, apart from a reduction in the transaction time from nearly four days to real-time, the implementation also makes information readily available and accessible to all parties online, secure and tamper-proof.

Axis Bank and Kotak Mahindra Bank have also conducted pilots in cross-border remittances and trade settlements, using blockchain technology. South Indian Bank had also successfully completed overseas transactions using blockchain from the UAE to India. The bank had also deployed a blockchain-based solution to manage end to end trade financing for one of its clients.

The Bankchain consortium also includes NBFCs like Mahindra & Mahindra Financial Services, which in November 2016 had announced the development of a blockchain solution in partnership with IBM to manage supplier-to-manufacturer trade finance transactions.

Internationally, banks have been testing blockchain-based solutions. About 21% of central banks recently surveyed said they will be implementing distributed ledger based solutions in the coming two years.

A group of banks including Goldman Sachs, JP Morgan Chase, Credit Suisse, Citibank, and BNP Paribas completed a pilot solution last month for the equity swaps market on the blockchain. The Commonwealth Bank of Australia has announced its plan to issue bonds over a blockchain system.