Last week, India launched an ‘Account Aggregator (AA) Framework’, a world-leading consented data sharing national infrastructure with the potential to transform the financial fortunes of the country’s over 63 million MSMEs and billion Indians.
After successfully building public infrastructure for digital identification (Aadhaar) and payments (UPI), India has now added a critical third layer — ‘Digital access to data’. Formalisation and Digitisation have been the key to the economic strategy and AA is another step in that direction.
Financialisation should now ensue on an unprecedented scale with freer flow of credit to small businesses and easier access to a variety of personalised financial products for individuals across the socio-economic strata.
The AA system launch marks the culmination of a five-year effort kickstarted by the Finance Ministry in 2016 under the aegis of the Financial Stability and Development Council and makes India a leader in the global open banking league tables. India’s eight major banks covering over 300 million consumers have already adopted the AA standards.
While the user (individual or small business) remains the epicentre of the AA system, it also has three other pillars.
Financial Information Providers (FIP), ranging from banks to tax platforms to insurance players, will be the key sources of data.
Financial Information Users (FIU) such as banks, NBFCs and fintech firms would use this data to offer the best financial products and services to consumers.
Account Aggregators (AA) — RBI-regulated entities that will allow people and businesses to share their data (sourced from FIPs) with FIUs in real-time. Most importantly, Account Aggregators do not store any data. They are just data blind pipes that assist in digital transfer of data which the customer chooses to share from one entity to another.
Despite the digital and financial footprint left behind, most data is fragmented.
Further, that data is primarily controlled and used by the respective companies for their own benefit.
The AA framework not only eliminates this data monopoly of digital and financial services companies handing over greater control of the personal and transaction data to the individual but also helps consolidate all the data enabling the individual drive significant economic value from the data.
This real-time, seamless and secure flow of data through AAs offer a solid value proposition for individuals across all economic strata. While the mass affluent will see the biggest value around customised insurance or investment plans, the less affluent will benefit from friction-free access to formal credit. The supply-side for such products is equally vibrant, with over over 100 VC funded new-age fintech companies offering tailor-made products.
The biggest beneficiary of the AA system will be the credit-starved MSMEs. Despite having enough data on financial health of a business, house banks (one which maintains the current account of a business) insist on physical collateral or personal guarantees from business owners for credit disbursals.
The challenge of consolidating the latest financial information on the business across different sources and short notice at which working capital credit is mostly needed also means it’s difficult for such businesses to go to other financial institutions for availing loans. As a result most MSMEs either end up borrowing from “private sources” at usurious rates or let go of the business opportunity.
Just 10 per cent of India’s 63 million MSMEs have access to formal credit and the RBI’s MSME committee has estimated a funding gap of up to ₹25 lakh crore for these units.
The AA system has the potential to revolutionise lending to MSMEs and liberating them from the exploitation by such house banks. AAs will allow much faster access of a businesses’ financial data to lenders, crunching the whole loan application cycle to a few minutes. Also, AAs can help businesses expeditiously share other credit-worthiness proxies like digital invoices, tax returns among others.
The example of a digital company like Zomato will be instructive in this regard. Zomato has over 1,50,000 active restaurant partners. The majority of these restaurants wouldn’t have access to formal credit despite verified digital footprint of orders and earnings on the Zomato platform. AAs will make access to formal credit friction-free for such restaurants potentially under-written on future orders on Zomato.
Also the current formal MSME loan book in total is about ₹19 lakh crore, and the market potential of lendable invoices on GST is already up to ₹25 lakh crore.
A slew of new-age lenders with sophisticated underwriting algorithms and greater risk appetite have already emerged in the country over the last few years and democratisation of data access through AAs is a win-win for such lenders and MSMEs. This should drive a favourable and secular move towards cash-flow based lending and away from the currently prevalent physical-collateral based lending getting more people and businesses in the formal credit system. Establishment of a credit marketplace post the launch of Sahay app should further drive a credit super-cycle for MSMEs.
As with any new public infrastructure, AA system will have to overcome concerns around platform stability, data privacy and grievance redressal mechanisms. These are some hiccups in a project that is otherwise one of India’s most far-reaching and ambitious initiatives ever.
The writer is a Director at Smahi Foundation of Policy & Research