Account aggregators are ready to widen Indian access to credit
PremiumThe sharing of personal financial data while ensuring data privacy will enable easy loans for individuals and small firms
The Pradhan Mantri Jan Dhan Yojna (PMJDY) revolutionized the financial services system for the most deprived section of society. The scheme is a step towards holistic financial inclusion, with features like no minimum balance requirement for a bank account, direct cash transfer enablement, access to Rupay Debit Cards and pension. As we complete 7 years of this initiative, its success needs to be celebrated for bringing more than 430 million beneficiaries, with ₹1.451 trillion in balances, under the banking system.
Citizens getting easy and affordable access to credit and insurance holds the key to holistic financial inclusion. According to an International Finance Corporation report on Financing India’s MSMEs, 80% of the addressable credit demand of small firms is met by informal financial sources.
That has been a key focus of the PMJDY mission as its next step towards financial inclusion. At present, individuals need to have physical collateral and must often run from pillar-to-post with bank statements, stamped documents from notaries, tax returns, and cash-flow statements to get a loan. Since the financial records of individuals are scattered across different organizations, it becomes challenging for them to consolidate all these statements while applying for credit. For instance, deposit receipts are stored with banks, life-insurance documents are with, say, the Life Insurance Corporation, and mutual fund investment details with asset-management companies.
Complementing the PMJDY, India recently unveiled the account aggregator (AA) network to overcome the challenges of access to micro-credit for individuals and micro, small and medium enterprises (MSMEs). An account aggregator enables the safe sharing of financial records, after the consent of the individual has been obtained, with financial service providers for access to small sums of formal credit. For example, when an individual or business applies for a bank loan, then an AA can obtain the applicant’s consent and collect information on bank accounts and other financial assets to share with other financial institutions that are part of the AA network. With access to financial records, lenders can establish eligibility for a loan. Since the financial data gets shared electronically by institutions via the AA, counterfeit documents are not an issue.
If a hotel owner wants to take a loan to renovate a property, s/he can share bank statements of the past five years with the lender. With these details, the lender will be able to determine the owner’s creditworthiness and provide micro-credit.
The AA network is thus a paradigm shift from physical collateral to information collateral. It will unlock access to affordable credit in a streamlined and trustworthy way. This will reduce the transaction cost of and time taken to sanction loans, make lower-sized loans more feasible for banks, and empower them to provide personalized loans and more innovative financial products.
An AA is a Reserve Bank of India (RBI)-regulated entity (with a non-banking financial corporation-AA license). The system has three components: Financial information users (FIUs), financial information providers (FIPs), and account aggregators. The AA acts as an intermediary that collects information from FIPs that hold a user’s financial data, like banks, and shares it with FIUs, such as lending agencies. The future plan is to make all financial data related to taxes, pension, investment and insurance available on the network.
Protection of user privacy is ingrained in the network. It has been developed on a consent mechanism that requires the individual’s permission to share data with an FIU. The consent method is designed on the principles of our Data Empowerment and Protection Architecture (DEPA), a policy proposed by Niti Aayog. Second, data shared on the AA network is end-to-end encrypted. It is encrypted by the sender and can be decrypted only by the recipient. Third, AAs are not allowed to store, process and sell the customer’s data. These design principles ensure that ownership of the data lies with individuals and is not monetized, so no conflict of interest arises when data is shared across the AA platform to provide better financial services. This is fundamentally different from the design principles of big global technology companies that have consumer data reside with them for monetization.
The goal should to scale and expand adoption of the AA platform in India. All stakeholders in the AA ecosystem need to play a pivotal role in this. Four apps—Finvu, OneMoney, CAMS Finserv and NADL—have operational AA licences. Three more have received in-principle approval from RBI (PhonePe, Yodlee and Perfios) and are expected to launch apps soon. AAs should focus on marketing and create awareness of the services they provide. The growth of these apps will lead to the growth of the entire AA ecosystem. Secondly, as all four apps are available only on Android smartphones, AAs should develop intuitive apps for feature phones. If AA network services are made available on feature phones, it will prove transformational by catering to a substantial group of individuals and enterprises. Thirdly, eight major banks—State Bank of India, ICICI Bank, Axis Bank, IDFC First Bank, Kotak Mahindra Bank, HDFC Bank, IndusInd Bank and Federal Bank—have joined the network. The process to on-board other FIPs, like the goods and services tax network (GSTN), insurance companies, National Pension System, etc, needs to be fast-tracked. Plans for non-financial players like health and telecom companies to join the network should also be accelerated. Fourthly, any technical glitches on the platform should be quickly resolved to build trust in the AA ecosystem.
Technology platforms born in India—Aadhaar, Unified Payments Interface, the Government e- Marketplace, DigiLocker and GSTN—are jewels in the Indian technology landscape and examples of how technology can be leveraged for citizen services. The AA network can be a new feather in the cap that would help India formalize credit and boost economic growth in the post-covid era.
These are the author’s personal views.
Amitabh Kant is chief executive officer, Niti Aayog
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