A couple of years ago, a report was published in India that Public Sector Banks lost more than $1.2 billion in loans where the documents provided were fake. Recently there were news reports that Federal Services Royal Commission (Australia) found that the
Home loans were being given based on fraudulent documents. These are not isolated incidents and definitely this is more prevalent in developing countries where Collateral Identification and Customer Digital Identity have issues.
These frauds not only lead to losses to the banks but also increase operational costs. This seems to be more common for Collaterals which are Properties, Factories and Machinery. Banks need to hire agencies to validate the collaterals, agencies to value
the collaterals, agencies to validate the titles and so on.
The governments understand the need to plug this leak. Many governments are working on digitizing land registries but those still have possibilities of fraud.
What could be the system which is tamper proof, can maintain public history of transactions in real time and once a transaction (financial / non financial) is posted is irreversible? This brings us to blockchain technology.
- Keeps a permanent record of transactions
- The transactions are in chronological order
- The transactions cannot be tampered with. The data is recorded in files called as blocks. Once a block is added to a Blockchain, it is added permanently, and can never be changed or removed.
(Source: Bitcoin Institute of Technology)
As you can see, this can’t be done by banks alone. The collateral records, such as property titles need to be on blockchain for the bank to validate and check any liens. There are already projects which have started in Georgia, Sweden and Ukraine to put
land title on blockchain. Closer home in India, NITI Aayog, the government of India think tank has initiated project to explore uses of blockchain to reduce fraud. The blockchain is being called as IndiaChain.
Once the collateral records move into blockchain, there would be expectation that the bank systems
- Can automatically check the authenticity of the given collaterals (inquire on blockchain)
- Can automatically check the authenticity of the documents (inquire on blockchain)
- Can automatically check the lien on the collaterals (inquire on blockchain)
- Can mark lien on the collaterals post approval and registration (create non financial transaction on blockchain)
- Can release the collaterals automatically (create non financial transaction on blockchain)
- Can foreclose the collateral or auction off (create non financial / financial transaction on blockchain)
Thus banks and in turn the technology vendors are in a unique position to take this initiative in partnering with governments which are starting the projects. The world moving towards blockchain linked collaterals management is only a matter of time.