Account Aggregators: Bridging The Credit Gap For Millions Of Borrowers In India

In what can be termed as a watershed moment for credit expansion in the country, the past week saw the launch of the Account Aggregator framework. To put things in the most simple of perspectives, this Account Aggregator (AA) framework is to credit what UPI has become to money transfers.

The aggregators, which will be licensed by the Reserve Bank of India (RBI), will be critical in bridging the credit gap between financial lenders and millions of borrowers in India with limited or lack of credit history. They will be structured as non-banking financial companies.

The framework had been in deliberation since 2016, and now, as it is finally underway, eight banks, that is the State Bank of India, ICICI Bank, Axis Bank, IDFC First Bank, HDFC Bank, IndusInd Bank, Federal Bank, and Kotak Mahindra Bank have already signed up for the framework. However, these are only the early adopters, and many more will be joining the bandwagon soon.

So, where does the account aggregator come in when it comes to ease of credit for urban borrowers or expansion of credit when it comes to borrowers in rural India, an untapped market with infinite economic potential.

How does one avail a normal loan today through any bank, say a personal loan?

The entire process begins with either the bank reaching out to the customer via a sales executive or the customer reaching out to the bank.

Assuming the initial conversation works out, the customer is then expected to furnish a long list of attested documents. The bare minimum list of documents include the Aadhar Card copy, PAN Card copy, bank statements for the previous three or six months, salary slips or income tax returns.

The challenge then for the customer is to procure these documents, get physical copies of each, and what must ideally be a five minutes exercise in a world so digital, sometimes takes five days. Also, most customers, at one time, prefer dealing with one bank, thus, missing out on the opportunity to evaluate the best possible offer for them.

If one goes for an automobile loan, home loan, or a business loan, the process only gets tedious, for they are required to submit cash-flow statements in some aspects, for the financial service providers, mostly banks or other formal lenders, to estimate their credit worthiness. Loans as small as Rs 50,000 too warrant the tedious to-and-fro of documents between the customer and the bank.

It is this documentation, perhaps, or the lack of it, that has kept India's micro, small, and medium enterprises at bay from accessing formal credit. For every single rupee accessed as credit through formal sources in India, six more rupees are accessed through informal sources, and this demand for credit runs into almost Rs 70 lakh crore.

Thus, for many, the documentation work is either tedious or one they are oblivious to by virtue of literacy or awareness, as evident in the rural areas. The situation of the individual borrowers is far more difficult, however.

For many first-time borrowers in India's third-tier cities, villages, or smaller towns, the challenge is the lack of formal credit history.

How does the bank estimate the credit worthiness of a parent who wants an education loan for their daughter, or for a shop owner who wants to expand her business, or for someone looking to start a business, and so forth?

Turns out, you need to have taken credit in the past to be able to take credit in the future, and for first-time borrowers, the barriers are too high, given the interest rates the bank charges them or the debt-trap informal sources can put them in.

Also, the size of the loans is an important consideration here, given most borrowers in rural areas are not looking for loans to the tune of one lakh rupees or more, but barely a few thousand, as little as ten thousand rupees too as N S Ramnath documents in his book, The Aadhar Effect.

He further elaborates that for any bank, to be able to make a significant profit on any loan, the average lending amount should be at least Rs 4,00,000, and therefore, most formal institutions do not have any incentive in bridging the credit gap for rural borrowers who are looking for loans as small as Rs. 3,000.

The duration of the loans is another consideration. Can banks be expected to lend Rs 3,000 as a weekly loan or any formal lender be expected to lend Rs 300 to a street hawker? The honest answer from the real world is no, for banks cannot go around estimating the credit worthiness or the lending intent or capacity of such small-ticket borrowers.

This is where the account aggregators come into play in a big way.

Only after user consent (this is the important part), these aggregators draw information from the financial information providers, which include banks where a borrower has their savings account, current business accounts, insurance providers, mutual funds services, and other tax and GST platforms.

The aggregators draw information pertaining to a single borrower or company, only after the informed consent of that borrower, and share it with the financial service providers which may include banks, creditors, wealth managers, personal wealth managers, and other financial consultants a borrower may wish to work with. Obviously, on both sides, that is the financial information providers and financial services providers or financial information users, the list can go on.

Thus, a financial information user or service provider can reach out to a financial information provider through the Account Aggregator framework. However, it is only after the consent of the user that the information requested will be shared with the financial information user or service provider. The consent will be approved by means of a PIN, as perhaps seen with UPI.

This consent for the account aggregator disables the to-and-fro of documentation, physical attestation, and the time wastage that was conventionally the norm. This also enables any borrower to access multiple services or compare multiple financial services to make the best choice.

The other important part here is that the account aggregator in question has no access to data, for the flow is completely encrypted in a manner that the data can only be accessed by the one requesting that information. Thus, this also eliminates the possibility of any data being stored, and is consistent with the principles of data privacy and protection. Therefore, borrowers, consenting to account aggregators, are not putting their data at risk in any manner.

Thus, an account aggregator, only by facilitating the flow of information essential for credit growth, ensures more data points for lenders and borrowers to reach any decision.

The framework has only recently been released for the customers, and therefore, some speculation on how far it can go is warranted.

Can financial information providers include e-commerce companies that may give a picture of the spending prowess of the borrower in question? Can the payment methods on an e-commerce site coupled with their bank statements or credit statements reflect the credit worthiness of a borrower?

Can banks and other formal lenders now be in a position to disperse small-ticket loans that can have weekly or daily payments, especially for borrowers in the rural areas, say a street vendor?

Turns out, in a world of digital payments, sky's the limit when it comes to listing financial institutions that may offer information or offer services, but at the nucleus of all this will be an account aggregator, merging all the available information and sharing it with the relevant institution, all with the consent of the borrower, thus giving them more control, and giving the lenders more clarity, even if it is for a loan as little as Rs 3,000 for a day.

The naysayers may discard this framework, citing it as urban phenomena, but that is what they said about UPI a few years ago. From 21 banks and 0.09 million transactions in July 2016, the UPI now has 249 banks and registered more than 3.5 billion transactions in July 2021.

Now, to the next big leap in the digital world-the account aggregators.