SynopsisThe RBI’s decision to have an Account Aggregator framework to narrow the credit gap in the MSME sector is praiseworthy. But banks have to play ball and businessmen have to trust the system for it to succeed.
The micro, small and medium enterprises contribute 30% to India’s GDP and some 40% to its exports. Yet, almost 80% of these small businesses lack access to credit. A report by the Association of Chartered Certified Accountants says nearly 50.7 million of the 63.4 million MSMEs in the country do not have access to formal lending channels.
One of the main causes of the lack of access to credit has been that small business owners have poor or no credit history. This pushes them away from organised lenders and towards using channels in the shadow economy to raise money for business.
For perspective, banks gave loans of Rs 13.2 lakh crore to small enterprises in September, which was 12% of the overall gross bank credit of Rs 109.5 lakh crore, says the Reserve Bank of India (RBI). The gross bank credit deployment (y-o-y) was in the positive territory in July and August, courtesy the Emergency Credit Line Guarantee Scheme. A IFC report says the addressable credit gap for MSMEs is about $380 billion.
This shows an enormous gap between credit’s need and supply. The government is not oblivious to this situation. Among the many efforts to streamline access to credit for individuals and small businesses, the RBI launched the much-awaited account aggregator (AA) framework in September.
This is a data sharing system. An individual who has an account with a financial institution can permit the sharing of the information — including personal wealth and assets — with another financial institution. The information is easily and securely shared within the financial ecosystem to help lenders decide the creditworthiness and financial position of the individual concerned. It would help small business owners, who mostly have no fixed income and depend on erratic payments, to get loans easily even if they do not have a credit history.
The system has three parts–the account aggregator, the financial information provider (FIP) and the financial information user. The aggregator is a new type of NBFC entity that has the RBI’s approval to manage users’ consent to share financial data: for example, mutual funds, banks and pension funds. FIUs are banks, NBFCs and lending agencies that can receive the data from FIPs. The single-window-like system to access an entity’s financial details can expedite the lending process.
Guidance model
Many NBFCs, fintechs and other parties in the financial ecosystem have hailed the model. It is the right step to ensure easy access to cash flow, says Amit Bhatia, Managing Director & Head of Private & Commercial Clients at Deutsche Bank India, though it will take some time for everybody to come on the platform. “Once you know you have enough data to underwrite, you will not only be able to lend more, but the cost of finance for the sector will also come down,” he says.
This framework will pave the way for open banking — a network of accounts and data that stakeholders can access in the financial services sector — in India, says Meghna Suryakumar, Founder & CEO, Crediwatch.
But both the professionals also point out that this system is still in its early days and it might take time for the framework to be fully functional. “I think the success of this framework largely depends on adoption by banks, especially the large ones. Only then the others will follow,” says Suryakumar.
Currently, eight banks have joined the AA network: State Bank of India, Axis Bank, ICICI Bank, IDFC First Bank, HDFC Bank, Kotak Mahindra Bank, IndusInd Bank and Federal Bank.
Suryakumar says smaller banks might need a gentle nudge to join the platform. She cites the example of lenders, such as Equitas Small Finance Bank and Gramin Bank, which started off as NBFCs, focused on smaller segments and have eventually become bigger. “These banks are already adopting technology. Some have kind of been tech-first banks. From that perspective, I think as the large banks lead this movement, all the other smaller banks will ultimately adapt to it and it will kind of trickle down to the last mile,” she adds.
The AA system is promising, but successful implementation of such a digital system requires a lot of work, experts say. Awareness tops that list. Unless the small businessmen are made fully aware of the workings of the system, they will not trust it.
iStockMillions of small businesses in India find it very difficult to access formal sources of credit.There is a long way to go for the AA system to be accepted by all, says Parikshit Bhanushali, Product Manager and Partnerships, OneMoney. The Hyderabad-based company calls itself India’s first account aggregator. It builds APIs for financial service providers to help them get consent-driven receipts and enable secure transfer of users’ data. “We have currently around 20,000 active users on the account aggregator framework. However, the potential is every single person, just like with the UPI,” Bhanushali says.
UPI or the Unified Payments Interface was introduced in 2016 to enable real time, instant money transfer by integrating payment mechanisms. It has become ubiquitous within five years due to a host of factors, including awareness.
Awareness and education
Bhanusali explains that going to a bank for a loan is becoming a digital journey. The AA system will be tech-enabled, so individuals and small businesses in rural India may need help to access the system. This means educating the masses, along with spreading awareness. “There will be a lot of hindrances or resistance while trying to take this system into the hinterlands. This is where education and awareness are important for customer acquisition. It involves going to the last mile, conducting seminars, teaching consumers and users how to use the AA platform, and making sure they engage with AA,” he says.
Further, small business owners in rural areas might not have adequate banking data or credit history, making it difficult for them to get loans. “This AA system can definitely empower them. But the banks they use will have to adapt to this system. A small bank or co-operative bank that doesn’t have tech infrastructure won’t be able to use this platform. Therefore, first, the process has to start from the bank itself,” Bhanusali says.
Once that link is activated, a small business owner might only have to share his phone number with a bank officer to share the data. Bhanushali does not see this system becoming a part of the mainstream before three-four years.
Nikhil Kurhe, co-founder of Finarkein Analytics, does not agree with that timeline. He points out that a sizable chunk of the population became comfortable with UPI in no time. The National Payments Corporation of India, which manages UPI, has said there has been a threefold increase in the number of transactions and the value in 2020-21 alone; and the user base is 200 million.
All AA would need, Kurhe says, is some innovation on the design front and some localisation. But the situation might be different for FIUs and FIPS. “For banks, information providers and users, there is a cause for concern. That cause is inertia. FIUs and FIPs need to be incentivised to participate. A government handout or regulatory push may not work. Only pure business sense will,” he says.
Using the example of UPI, Kurhe says any business not offering this payment service is at a disadvantage now and may lose out on customers. Such a situation has to happen here, too.
Risks & Gains
But the biggest concerns of concentration of financial information are data privacy and security. This is another reason why education and awareness are of utmost importance, says Bhanushali, as people in India are not much worried about data privacy. Most times, even businessmen are not careful enough, says Vayana Network founder and CEO Ram Iyer. “If you are giving consent to a lender to share your data, do you actually know what you are giving? We have seen many times that small and micro borrowers just sign any agreement you put in front of them. They do not even read it,” he says.
iStockRecent changes to the definition bring the retail and wholesale traders under the ambit of MSME, allowing them easier access to formal financing.Another major issue is data security. If there is a leak, it could be disastrous for thousands of small borrowers. So, all participants should invest in information security systems.
When you have all your financial information in one place and the platform allows you to share the information, its applications cannot just be limited to availing loans and getting credit. The AA model can be a booster for other segments in the financial sector, experts point out.
Insurance can be a gainer. Vayana Network’s Iyer says: “Just take the 2018 Kerala floods tragedy. If you want to understand what kind of insurance product to offer a small business owner who lost his business in the flood, the AA system can be of help. It will give you his financial and asset details, including how much material he would have in his godown or shop. You would have his bank statement along with every GST filing. Tremendous information.” Such information can be useful in deciding the premium or to process claims.
The AA framework can also be used to distribute sachet finance, i.e., small bite-sized financing that is specific to one particular sector and a particular size of business. Kurhe of Finarkein Analytics sees it as a platform that can sell personal finance products, cards and other mass market fintech and financial services.
Business possibilities
There is no playbook on how lending, insurance, and other fintech verticals could work in a post-AA world, says Kurhe. For small businesses, the AA system could also be a wealth generator and manager.
Financial planning firm GoalTeller intends to deliver expense management services using this platform. Vivek Banka, co-founder and CEO, GoalTeller, explains that SMEs have idle cash in their accounts. They cannot afford to have a treasure department to use that money and earn more or build a cash buffer. “Bank accounts give little or no interest. Small businesses can invest that money in either corporate bonds or liquid funds to generate returns,” Banka says. This can help companies build emergency funds. Banka says he saw a lot of companies that were struggling for funds during the initial phase of the lockdown. “Using the AA system, our platform will calculate the average balance they have in their current or savings account, and then tell them that if this was invested properly with no additional risk, what is the actual return they would have got,” he says. GoalTeller will also help in credit management, GST management and cash flow management.
Early adopters can be trailblazers here, says Kurhe. However, even though credit has massive demand, it will not bring volumes in terms of data pulls, customer interaction and touchpoints, and recall experience. “UPI, for example, is something we use daily. But that won’t be the case with the AA ecosystem. So, if the ecosystem remains credit and banking centric, it will be stuck with a lending tag,” he says.
Bhanushali lists another risk for AA: What if people don’t use it even after customer acquisition and awareness? If there aren’t enough banks and partners on the system, it won’t work. Others won’t be motivated to sign up. “Even private banks will also not come on the platform then. If there are regulatory or other hurdles that lead to a drop in customers, no bank will use this.”
There is a risk even if all players in the financial ecosystem sign in.
The Account Aggregator system promises to share data only after getting an individual’s consent. But if all banks are on it, it would force small businessmen applying for loans to use the AA ecosystem even if they do not want to.
Experts use the example of Aadhaar. Even that framework was said to be voluntary. But today, Aadhaar is pretty much mandatory for a citizen to get some services without going through much trouble.
(Edited by Ram Mohan. Illustrations by Sadhana Saxena)
(Originally published on Nov 30, 2021, 08:42 AM IST)
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