Small businesses in India do not have access to credit because of the paucity of data and the financial health of their business. Lenders, however, continue to evaluate a business either on the collateral they can offer or their financial statement, first always being inadequate and the latter never updated as current. But the lending to small businesses has been gradually turning digital. GST was the first step which has potential to change short-term lending to small business, and Account Aggregator (AA) is the second aspect that can bring revolution to the industry in ways similar to what UPI did for payments in India.
As financial inclusion becomes a key priority for the Government of India to drive equitable socio-economic development, data plays an increasingly important role in ensuring improved access to low-cost financial products and services for both customers and businesses. Lenders like banks, NBFCs, and Fintech players are embracing innovative digital technologies to streamline collecting financial information from various sources, assembling, verifying and processing data more effectively.
AAs are RBI-licensed new financial entities aimed at bringing disparate customer information in a consolidated manner on a single platform for sharing with third parties with customers’ unequivocal consent. Amid a raging worldwide debate on consent and data privacy, AAs promise to give total control to customers over the usage of their data, with the ability to revoke consent whenever they want.
AAs have the potential to revolutionize the digital lending segment and enable the integration of more people and businesses into the formal credit system. By reducing paperwork, AA allows speedier access to consented data of individual customers and small businesses, allowing lenders to assess a potential borrower’s credit risks and process more loan applications faster, without compromising due diligence and safety. It can also reduce the rate of dropouts by customers in the loan application process by reducing the need for physical paperwork and creating a more hassle-free customer experience.
AAs play a pivotal role in facilitating easy access to loans for NTC customers, especially small businesses with low or no credit history. Only about 10% of MSMEs in India have access to formal credit. In the absence of a formal credit record, AAs can help businesses share alternate financial data with lenders, such as tax returns, bank statements, bill repayment behavior, spending information, online shopping behavior, and more, with lenders to check their creditworthiness. Since most MSMEs in India lack adequate collateral for loan applications, AAs can help lay the groundwork for shifting to cash-flow based lending from asset-based lending. With the upcoming Public Credit Registry (PCR), the AA framework would empower lenders to offer sachet sized loans based on cash flow predictions of the businesses.
For example, a neighborhood vendor might avail credit by sharing his cash-flow statement in the absence of any asset. This helps businesses increase their avenues of availing low-cost credit, especially from traditional lending channels. This way, AAs can also help lenders de-risk their loan books and reduce NPAs, enabling them to offer their customers more personalized loan products by applying advanced analytical models to the authentically available data. Using AA, lending institutes can cater to underserved segments, championing financial inclusion.
If you think of the challenges of a lending institution in underwriting credit for short-term needs of small business in India, it manifests from following questions:
- How does a lender assess the level of business–turnover, payment recovery cycle, type of customers?
- How does a lender ensure the margin in the business, payment cycle, quality of earnings, and deployment of cash in business versus outside business?
Unlike large corporates wherein these are assessed based on their balance sheet, ratings etc. small businesses are assessed differently and historically non-availability of data meant only collateral-based borrowing was available to them.
Both GST combined with AA could change the landscape completely, if lenders can evaluate the data coming from GSTN and the Banking data of customers from AA–a triangulated view of combining the both can really solve the problem of credit for small business owners and the lending in India would move from collateral to cash flow based lending.
However, there seems to be a big error of judgement regarding the framework of providing access to data to lenders through the Account Aggregation framework. It seems that the method of UPI framework is applied for AA, which probably may not work for credit assessment of small business. We can segregate these problems in following:
- It does not mandate banks to compulsorily integrate and provide information about their customers. If we want the benefit of this to be realized then it should be made mandatory that all Banks have to mandatorily sign up with all AA. Unless the entire banking accounts are not accessible, the journey would be half way through as some small businesses who are maintaining their account with a Bank which has not signed up with AA would be excluded from its benefit.
- Unlike Saving Banks accounts which can be uniformly tracked within the Banking system by mobile number of the customer-for small businesses fetching information from mobile numbers may not be a workable solution given that most of the current account business owner gives multiple mobile numbers of their employees who operate the account. The best way to pull information is throuh PAN (Permanent Account Number) which is uniform across all accounts maintained by the prospective borrower entities.
- In the AA proposed tech architecture it is proposed that the borrower would have a choice to choose which bank account information he would like to give to lender–while the choice should be given to borrower but the prospective lender should be provided the information about the number of accounts the borrower is maintaining within the Banking system. Without this information, for lenders to arrive at the repayment ability of a borrower would still be difficult.
Sahay, a digital lending marketplace, also stands to benefit from the AA framework, which will help lenders access borrower data quickly and safely, at a significantly lower cost in real-time. Armed with accurate, consented borrower data that can be used as loan collateral, Sahay can extend credit, especially to liquidity-starved small businesses.
A real Fintech disruption, account aggregators, can be a game-changer in the lending space with the potential to truly democratize credit, but without compromising data privacy and consent. With the right support and enthusiastic participation by all stakeholders, it can create a robust and revolutionary lending ecosystem that can make India a data-rich country, boost its digital economy, and drive MSME growth and development in India.
The writer is Executive Chairman and Managing Director of UGRO Capital Limited, a BSE listed technology enable small business lending platform.)