Explained: How RBI’s Account Aggregator Framework Can Help MSMEs Get Loan With Hassle-Free Data Sharing

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

Credit and financing for MSMEs: The interoperability of the Unified Payment Interface (UPI), which has revolutionized payments in the country, has come to change the way in which the sharing of individual or commercial data is carried out between two institutions in the sectors of banking, credit, insurance and related segments offering financial services. The Account Aggregator (AA) framework, which was first announced by the Reserve Bank of India (RBI) in 2016, will now be open to users to access account aggregation services.

The AA Network was started on the premise that customer data is typically fragmented and exists in silos in the databases of banks, lenders, insurance companies, government agencies, and other entities. In order to provide an institutional framework for transparent and digitally secure data sharing between, for example, a borrower and a bank for access to credit, the AA network was created instead of spending time gathering information such as scanned copies of bank statements, notary stamped documents, bank statements, GST returns, cash flow, etc. then share them with the lender.

According to the RBI, AAs are a new category of non-bank financial corporations (NBFCs) that offer account aggregation services – retrieving or collecting information about its clients regarding their financial assets and consolidating them, organizing them, presenting them to the client or to any other person as instructed by the client – in exchange for a fee.

Here, financial assets could be bank deposits, including term deposits, savings deposits, recurring deposits, current deposits, deposits with NBFC, SIPs, government securities, stocks, bonds, bonds, 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 information of their documents or to browse different sites to obtain the information required by financial service providers.

This has the potential to rationalize access to credit for MSMEs. For example, instead of the physical collateral usually required for a MSME loan, this information collateral-based credit underwriting can help the business access small formal credit. Accelerating data sharing to expand the reach of financial services for better products and services can help micro, small and medium enterprises (MSMEs) access credit in a more convenient and reliable way, which could potentially help cope with the credit crunch that MSMEs are currently experiencing.

“Until now, information sharing has always been a tedious paper process, often with general consent. By sharing data digitally in a machine-readable form, it helps make credit decisions faster and more reliable for MSME loans. In addition, as the data goes from source to destination via AA, without any processing of the physical data by the consumer, no error-prone certification and notarization process, it also makes the data more secure and reliable, thus reducing the fraud cases, ”Utkarsh Sinha, Managing Director, Bexley Advisors told Financial Express Online.

The lack of organized financial statement records pushes MSMEs to obtain credit through informal channels. Importantly, out of 6.33 million MSMEs in India, only 10% have access to formal credit, according to a November 2019 report from PwC and FICCI titled Wider Circle.

“The AA system has the potential to revolutionize lending to MSMEs by allowing much faster access to business financial data to lenders and reducing the loan application cycle to minutes. With AA now allowing sharing of other solvency proxies like digital invoices, tax returns, etc. formal credit system. This in turn will open up multiple opportunities for the needs-based Book Now Pay Later (BNPL) service, which is essential for Indian MSMEs, ”said Anubhav Jain, co-founder and CEO of Rupifi – a lending platform. online for SMEs – Financial Express online.

Access to capital for MSMEs has been limited as banks and lenders felt that loans to MSMEs are too risky while loan tickets are too small, compared to loans to large companies, to be worth worth the time to spend. The cost of processing loans and managing a small ticket becomes very high for banks in such cases.

“With the proposed framework, access to data is democratized, improving the ability of subscribers to have access to a richer data set and offering MSMEs the possibility of borrowing from the lenders of their choice, at more attractive rates. . This reversal of the market structure will contribute to greater and more viable access to credit for MSMEs, ”Rohit Ramana, co-founder and CFO of Mintoak, backed by HDFC bank, told Financial Express Online. HDFC Bank reportedly invested 10.27 crore rupees in Mintoak for more than 5% of the capital last month.

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For Gurugram-based Conquerent control systems, which manufacture and supply electrical control panels, control panels, etc., the AA network could help get more credit if their data could be pooled between institutions for better credit subscription.

“The fundamental problem 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 companies. For example, my bank says I can get more loan if there is no problem with my balance sheet, but my Rs 1.5 crore has been stuck with a contractor for the past two years. It has impacted my balance sheet as the government says payment must be made to MSMEs within 45 days of purchasing goods, ”DP Goel, Managing Director of Conquerent Control Systems, told Financial Express Online.

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

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

“Account aggregators are a great addition to India’s digital infrastructure as they will allow banks to access authorized data streams and verified data. This will help banks reduce transaction costs, which will allow us to offer lower loan amounts and more suitable products and services to our clients. It will also help us reduce fraud and comply with future privacy laws, ”said Anjani Rathor, Chief Digital Officer, HDFC Bank on the AA framework.

Data shared by AA with banks or other financial institutions with the consent of the user is encrypted and can only be decrypted by the recipient. In addition, the period during which the institution would have access to the data will be visible to the user when giving their consent for the sharing of the data.

“There are multiple advantages thanks to the installation of AA. As NBFC – AA will act as a one-stop-shop for data collection and transmission, banks will be able to devote more time to underwriting and their customers instead of gathering information. The most important benefit may also take the form of access to alternative data for banks using the framework. As more loan service providers (LSPs) join the account aggregation architecture, they can potentially share transaction / cash flow data, which will allow banks to complete the traditional underwriting methodologies with data based on cash flow. Abhinav Sinha, co-founder of Eko, told Financial Express Online.

This would allow banks not only to offer smaller loans, but also to reach a wider set of customers for loans that they might have refused in the past. Eko offers mobile banking technology for online payments, money transfers and other cash management services.

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