AA framework offers UPI-style revolution in MSME financing – The Economic Times

Clipped from: https://economictimes.indiatimes.com/small-biz/sme-sector/aa-framework-offers-upi-style-revolution-in-msme-financing/articleshow/82423717.cmsSynopsis

Four private banks set to go live by July on account aggregator framework

Private sector lenders IndusInd Bank, HDFC Bank, ICICI Bank and Axis Bank are likely to go live with the account aggregator (AA) framework by July, the chief executive of a collective of such aggregators told ET.

The AA framework is intended to improve lending to micro, small and medium enterprises (MSME), based on their business transactions.

India’s largest public sector bank, State Bank of India, is also expected to offer services on the platform around the same time, said BG Mahesh, cofounder and chief executive of DigiSahamati Foundation.

Customers of these banks will be able to share their digitised financial data with lenders (same banks act as lenders) after the launch, Mahesh added.

“Initially, these first wave of banks will implement AA framework in select use cases such as personal and SME loans,” Mahesh told ET. The impact of AAs on the cash flow lending product will be seen 3-6 months after the AA framework goes live, he added.

The AA framework allows users to share their financial data in a machine-readable format with their explicit consent. This will replace the existing portable drive format (PDF) and hard copies. The consent is given on client-facing apps provided by account aggregators, which have received licenses from the Reserve Bank of India.

The RBI has issued operating licenses to four AAs — CAMSFinServ, Cookiejar Technologies, FinSec AA Solutions and NESL Asset Data Ltd.

AAs are expected to revolutionise the field of fintech, like how the Unified Payment Interface changed the payment system. Faster adoption of AAs by banks and non-banks could change the lending landscape and empower micro, small and medium enterprises that struggle with access to formal credit, industry experts have said.

Emails to IndusInd Bank, HDFC Bank, ICICI Bank, Axis Bank and SBI were not answered till press time.

If unique social security identification Aadhaar is the identity layer of India Stack, UPI the payments layer, then AA is considered the consent layer.

DigiSahamati Foundation is hoping the new system will aid MSMEs that heavily rely on non-formal credit because they have traditionally not been able to provide collateral or complete financial documents to formal lenders.

According to a joint PwC-Ficci report of 2019, of the around 64 million MSMEs in India, only 10% have access to formal credit.

“SMEs are eager to use this framework as they need access to formal credit. The AA framework enables the lender (financial information users) to get access to verified financial data of the customer. Very soon, GST data will also be available through the AA framework, enabling the lender to access digitally signed invoices that were submitted to GST,” Mahesh said.

With this system in place, he said, lenders can use the bank statements and GST data to give loans based on the cash flow of the SMEs, and a decision can be arrived at within minutes. The entire process can be done digitally, avoiding a visit to the bank branch. Once the loan is approved, the lender could disburse the amount using UPI.

“The average invoice size of these MSMEs is Rs 78,000 and they raise about five to six invoices every month. If the MSME wants to take a loan of Rs 35,000, he has to submit a lot of data in paper or PDF form – bank statement and balance sheet. Small loans for a short duration may not be attractive for lenders in view of the high cost of processing a loan. AA drastically reduces the time and effort for both the lender and borrower,” said Mahesh

Banks have evinced interest in coming on board the DigiSahamati platform.

“Banks are very keen to make use of the platform for multiple reasons. AA removes a lot of friction and pain points when it comes to acquiring data. With AA emerging as a disruptor, banks will eventually embrace digitised financial data sharing,” he said.

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