Axis Bank, ICICI Bank, HDFC Bank, and IndusInd Bank are already sharing data based on user consent on the AA network.

Credit and Finance for MSMEs: The interoperability of unified payments interface (UPI), which revolutionised payments in the country, has come to change the way sharing of individual or business data takes place between two institutions across banking, lending, insurance, and related segments offering financial services. The Account Aggregator (AA) framework, which was first announced by the Reserve Bank of India (RBI) back in 2016, will now be open for users to access account aggregation services.

The AA network has been launched on the basic premise that customer data is generally fragmented and exists in silos in databases of banks, lenders, insurance companies, government bodies, and other entities. In order to provide an institutional framework for seamless and secure data sharing digitally between let’s say a borrower and a bank for credit access, the AA network was created instead of dedicating time in collating information such as scanned copies of bank statements, stamped documents from notaries, bank statements, GST returns, cash flow, etc., and then sharing it with the lender. 

According to the RBI, AAs are a new class of non-banking financial companies (NBFCs) that offers account aggregation services — retrieving or collecting information of its customer pertaining to their financial assets and consolidating, organizing, presenting it to the customer or any other person as per the instructions of the customer — in exchange for a fee.

Here, financial assets could be bank deposits including fixed deposits, saving deposits, recurring deposits, current deposits, deposits with NBFCs, SIPs, government securities, equity shares, bonds, debentures, ETFs, insurance policies, balances under the National Pension System (NPS), etc. With AA services, the user is not required to physically share hard copies of documents from various entities or confidential login details of his/her documents or browse through different sites for information required by financial service providers. 

This has the potential to streamline credit access for MSMEs. For instance, instead of physical collateral usually required for an MSME loan, this information collateral-based credit underwriting can help the business access a small formal credit. The fast-tracking of data sharing to broaden the scope of financial services for better products and services can help micro, small, and medium enterprises (MSMEs) access credit in a more convenient and trustworthy manner that eventually might help address the credit crunch faced by MSMEs currently. 

“Sharing information had always been a cumbersome paper-based process thus far, often with blanket consent. By sharing data digitally in machine-readable form, it helps credit decisioning become faster and more reliable for MSME lending. Also, as data is from source to destination via AAs, without any consumer handling of physical data, error-prone certification, and notarization processes, it also makes the data more secure and reliable, thereby reducing instances of fraud,” Utkarsh Sinha, Managing Director, Bexley Advisors told Financial Express Online. 

Lack of organised records of financial statements pushes MSMEs to secure credit through informal channels. Importantly, out of 6.33 crore MSMEs in India, only 10 per cent have access to formal credit, according to a November 2019 report by PwC and FICCI titled Wider Circle.

“AA system has the potential to revolutionise lending to MSMEs by allowing much faster access of financial data of businesses to lenders and reducing the loan application cycle to a few minutes. With AA now making it possible to share other credit-worthiness proxies like digital invoices, tax returns, etc., it will help businesses towards cash-flow-based lending from current physical-collateral-based lending thereby getting more people and businesses in the formal credit system. This will, in turn, open multiple opportunities for need-based Book Now Pay Later (BNPL) facility, which is much needed for Indian MSMEs,” Anubhav Jain, Co-founder & CEO, Rupifi — an online lending platform for SMEs — told Financial Express Online. 

Access to capital for MSMEs has been limited as banks and lenders have felt lending to MSMEs is too risky while the loan tickets are too small, in comparison to loans to large enterprises, to be worth spending time on. The cost of loan processing and managing a small ticket size becomes very high for banks in such cases.

“With the proposed framework, access to data is becoming more democratised, enhancing the ability of underwriters to have access to a richer set of data and provide options to MSMEs to borrow from lenders of choice, at more attractive rates. This flipping of market structure will help in greater and more viable credit access to the MSMEs,” Rohit Ramana, Co-Founder and CFO at HDFC Bank-backed Mintoak told Financial Express Online. HDFC Bank had reportedly last month put Rs 10.27 crore into the Mintoak for over 5 per cent stake. 

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For Gurugram-based Conquerent Control Systems, which manufacturers and supplies electric control panels, control panel boards, etc, the AA network could help raise more credit if their data could be collated across institutions for better credit underwriting.

“The basic issue for micro and small industries is that they are not able to provide systematic data to banks. The balance sheet is almost never complete for such enterprises. For instance, my bank says I can get more loan if there is no problem in my balance sheet but my Rs 1.5 crore is stuck with a contractor for the last two years. It has been impacting my balance sheet while the government says payment has to be made to MSMEs within 45 days of goods procurement,” DP Goel, Managing Director, Conquerent Control Systems told Financial Express Online. 

The Ministry of Finance had last week in a statement informed that eight banks have been onboarded onto the AA network. This included Axis Bank, ICICI Bank, HDFC Bank, and IndusInd Bank that are already sharing data based on user consent while State Bank of India, Kotak Mahindra Bank, IDFC First Bank, and Federal Bank will shortly begin the same.

Currently, four apps are registered as NBFC-AAs in the network — Finvu, OneMoney, CAMS Finserv, and NESL with operational licenses while PhonePe, Yodlee, and Perfios have received in-principle approval from RBI to be AAs. 

“Account Aggregators are an exciting addition to India’s digital infrastructure as it will allow banks to access consented data flows and verified data. This will help banks reduce transaction costs, which will enable us to offer lower ticket size loans and more tailored products and services to our customers. It will also help us reduce frauds and comply with upcoming privacy laws,” Anjani Rathor, Chief Digital Officer, HDFC Bank told Financial Express Online.

The data shared by AAs with banks or other financial institutions with the user’s consent is encrypted and can be decrypted only by the recipient. Moreover, the time period for which the institution would have access to the data will be visible to the user at the time of giving consent for sharing the data. 

“There are multiple benefits through the AA facility. As NBFC – AAs will act as a one-stop shop for collection and passing on of the data, banks will be able to focus more time on underwriting and their customers instead of collating information. The larger benefit can also come in the form of access to alternate data to the banks using the framework. As more loan service providers (LSPs) join the account aggregator architecture, they can potentially be sharing transaction/cash flow data, which will allow the banks to supplement traditional underwriting methodologies with cash-flow based data.” Abhinav Sinha, Co-Founder, Eko told Financial Express Online.

This would enable banks to potentially not only offer lower ticket size loans, but also possibly reach out to a broader set of customers for loans which in the past they might have rejected. Eko offers mobile banking technology for online payments, money transfers, and other cash-management services.