India is a developing country, with small and medium scale businesses coming up in various sectors, almost every day. However, the main problem they face is the shortage of cash in the form of credit and loans. The new Indian Account Aggregator will solve the financial crisis faced by small enterprises, claims World Bank.
India’s micro, small, and medium enterprises (MSMEs) are confronted with a credit crunch ranging from $250 billion to $300 billion. According to a blog post by the World Bank, even prior to the pandemic, 92% of small businesses in the country did not have access to formal credit.
- Absence of physical collateral hinders MSMEs from accessing credit from formal financial institutions, pushing them towards informal sources at high interest rates.
- Small businesses requiring frequent small working-capital loans face difficulty due to non-standard loan requirements that many lenders find impractical.
- The high cost of acquiring and verifying financial documents poses a challenge for MSME customers, and the lack of a standardized information-sharing system increases the risk of fraud.
- Financial institutions hesitate to provide loans for small amounts or unorthodox loan packages due to the substantial investment required for reviewing customers’ financial data.
India’s existing data-fiduciary-centric model hinders the financial empowerment potential of individuals and businesses as it requires them to approach the original data holder for access. Furthermore, the current storage methods for financial data are inefficient and pose privacy risks.
However, India is making progress in tackling these obstacles in the market, and a component of the Digital Public Infrastructure, Account Aggregator (AA) architecture holds the potential to facilitate access to financial institutions for underserved individuals and businesses.
The Data Protection Bill in India has introduced the concept of consent managers, also known as Account Aggregators. These managers are responsible for overseeing the sharing of data among various institutions using the DEPA electronic artifact. The Reserve Bank of India (RBI) introduced and implemented Account Aggregators in September 2021. There are several benefits of account aggregators in digital payments.
The following diagram depicts the pathway through which data will be transmitted from the Financial Information Providers (FIPs) to the Financial Intelligence Units (FIUs). User interaction with the system occurs via the app provided by the Authorized Agents (AAs).
With the AA architecture, individuals will have full control over their data as it facilitates the standardized electronic transfer of information. This standardized format will also simplify data sharing between different institutions. The impact of this architecture on the sharing of financial data could be comparable to the transformative effect that UPIs had on money transfers.
The AA ecosystem initially began with only eight banks, but it has now grown to include approximately 200 financial institutions, encompassing both public and private banks, along with certain insurance companies. In the current fiscal year of 2023, around $750 million has been distributed through the AA framework, with half of the loans being allocated to the MSME sector.
Benefits of Account Aggregators in Digital Payments
Let us look at the benefits of account aggregators in digital payments in the Indian economy:
- Aadhar and UPI have facilitated the creation of digital transaction records, benefiting millions of individuals such as shop owners, farmers, traders, and MSME entrepreneurs. This transaction history can serve as a trust-building tool with financial institutions, enabling access to credit through innovative lending solutions.
- Aadhar Authentication makes accessing and utilizing this transaction data affordable, secure, and convenient. It creates an environment conducive to innovation in extending credit to the informal economy by shifting from physical collateral to information collateral.
- AA ensures standardized, secure, instantaneous, and easy sharing of data. Lenders can leverage past cash flow and revenue generation to offer small working capital loans and evaluate the repayment capacity of businesses. Moreover, AA facilitates safe and secure document sharing as the FIU directly acquires documents from financial institutions or banks.
- By utilizing AA, the cost of sharing and analyzing financial data could be reduced to less than Rs. 10 per customer. Additionally, the time required to access and analyze data would significantly decrease. These improvements empower financial institutions to customize innovative loan packages for different segments of society.
Also Read: Top Digital Payment Banks & E-Wallets In India
Indian Account Aggregator will solve the financial crisis faced by small enterprises. This ecosystem encompasses various sectors, prioritizing customers as the central focus. It offers a secure interface through which users can provide consent to share their private and sensitive data.
As the system continues to develop, it has the potential to revolutionize additional industries such as healthcare, insurance, personal financial management, and advisory services. Access will extend beyond financial data to include social media, credit card points, ride share data, health data, and other digital information, opening up limitless opportunities. Encouraging private participation will further stimulate innovation within this context.
Source: World Bank Blog
