Fifteen Indian banks have come together to form a new company which will use blockchain technology to process inland letters of credit (LCs) in a first such initiative.
Bankers said that the new system will verify data using invoices on goods and services tax (GST) and e-way bills which will quicken transactions and also eliminate risk of frauds, reports the Economic Times.
The company called Indian Banks' Blockchain Infrastructure Co Pvt Ltd (IBBIC) will have fifteen shareholders holding an identical 6.66% stake in the company.
These banks include ten private sector, four public sector and one foreign bank. They are RBL Bank, ICICI Bank, HDFC Bank, Kotak Mahindra Bank, Axis Bank, IndusInd Bank, Yes Bank, South Indian Bank, Federal Bank and IDFC First Bank. Public sector banks State Bank of India (SBI), Bank of Baroda (BoB), Canara Bank and Indian Bank and foreign lender Standard Chartered are the shareholders. Individual banks could not be reached for comment.
Bankers said using blockchain technology will eliminate paper work and reduce transaction time to a few years in a secure environment.
"This company will provide a blockchain based network connecting banks and clients. Disbursements on domestic LCs which used to take four to five days can be done in four hours. It will also eliminate frauds since it will be encrypted via blockchains and there will be no way two LCs can be issued on the same invoice which somtimes happens now," said Varun Bakshi, head of products, transaction banking at RBL Bank.
The system will be based on Infosys' Financle Connect. Each bank has agreed to invest Rs5 crore in this company which was registered in the last week of May. The total capital in the company will be Rs75 crore and banks are likely to complete their investment by 30 June.
"Everyone will have a proportinate shareholding. We will also have a five member shareholder directors which will have representives from BoB, ICICI, Axis, Kotak and SBI," said Akhil Handa, head fintech and digital lending at BoB. The shareholder directors will be appointed on a rotation basis annually.
Bankers expect this new venture to be up and running within a year. Hiring for this new company will begin later this fiscal. It will be an open architecture model in which new banks can join.
"This has been in the works for many months. We started with ten banks and now are fifteen. More banks can also join as shareholders in the future and it will be open for all banks to use this infrastrcuture," Handa said.
Banks have also kept the Reserve Bank of India (RBI) in the loop and the regulator is said to have no objections in the new venture.
To be sure, different domestic and foreign banks have individually tested blockchain based transactions for cross border trade financing. However, this is the first time such a venture is being done for domestic trade finance.