By Ravi Modani
Credit and Finance for MSMEs: India’s fast economic growth has created a vibrant credit market. At present banks, NBFCs, and other lenders offer loans to about 50 million entities. This number may go up to 250 million in the near future.
Financial borrowing takes place between a lender and a borrower. With no credit history for the borrower, the lender needs due diligence on the borrower’s credentials. For this, the borrower’s financial data needs to be shared with the lending institution which can be added to their database for future use. Moreover, the process is repeated for every transaction and there is no control over the data. While the lending institution’s intentions may not be mala fide, the data may find its way into the open market.
The Reserve Bank of India has addressed this problem by launching the ‘Account Aggregator Framework. An Account Aggregator is an RBI-licensed entity with an app and digital portal that allows customers to give use-based consent to initiate the sharing of their data. The digital architecture of the portal ensures that information is accessed only when there is a genuine need, and only by those who have the necessary permissions, for a limited period of time. This new framework comes as a boon to individuals and small businesses as lending institutions will no longer be able to store, analyse and sell financial information.
RBI’s account aggregator framework went live in September 2021 to act as consent managers for customers and to collect and share their financial information safely. The parties involved in the AA framework include the Financial Information Providers (FIPs), the Financial Information User (FIUs), the customer and the AA. FIPs who already have information about their customers will be able to share information with the customer’s consent. This information can be shared with an entity that wishes to examine it, known as the FIU. This information can only be shared after the customer gives their consent. The information flow is as follows –
- A customer approaches the FIU for credit
- The FIU requests the AA for the customer’s financial information
- The AA asks the customer for consent to share the information
- If the customer gives consent, the AA approaches the FIP for information about the customer
- The FIP shares information with the AA in an encrypted form
- The AA transfers the information to the FIU
- On the basis of the information, the FIU may decide whether or not to give credit to the customer.
Since the FIP provides data in an encrypted form, the AA cannot actually view the data. As per the RBI guidelines, the AA cannot store, process or sell the data. It merely obtains and transfers the data from the FIP to the FIU after obtaining the customer’s consent.
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This system can now be used to provide credit to millions of borrowers in India who otherwise would not be able to access finance since the lenders are not aware of their credit profile. FIUs can now take instant credit decisions and immediately disburse funds. This framework will also assist FIUs to enhance their underwriting abilities as they can seek access to alternative sources of data in the case of customers with weak credit scores. Availability of data will open new opportunities for both lenders and borrowers without compromising on security.
All account aggregators are required to be licensed by the RBI and registered under the Companies Act, categorised as Non-Banking Financial Institutions. They are known in the industry as NBFC-AAs and only have the authority to facilitate information flow. The process is regulated and completely transparent.
RBI is now onboarding NBFC-Factors on the AA ecosystem. This will ease the funding challenges for businesses that wish to use factoring services. Since the process is consent-driven, the privacy of data is assured. The AA ecosystem aligns India with other major governments that are all moving towards protecting customer data. Since it is completely system-driven, there is no chance of fraud by any player.
With the AA framework in place, India’s financial ecosystem will see a complete transformation. It will do to the credit sector what the United Payments Interface (UPI) did to the digital payments system. There is excitement in the financial sector about how this disruption will revolutionize the lending industry in the next few years.
Ravi Modani is the Founder and CEO of 121 Finance. Views expressed are the author’s own.
