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Digitization of payments, in tandem with the adoption of Aadhaar across India, will lead to steady democratization of credit to small businesses and users in the country, said Nandan Nilekani, co-founder and chairman of Infosys Ltd and founder-chairman of UIDAI.

Speaking at the Mint Annual Banking Conclave on Wednesday, Nilekani explained how the adoption of Aadhaar can transform lending and make instant loans available for many more users.

“Aadhaar and UPI (unified payments interface) are helping transactional efficiency, migrating to high-volume, low-cost and small ticket-size transactions. This leads to expanding the market, as well as social inclusion. What these are now doing is also creating a digital footprint. For example, when a small retailer sells or buys something digitally, there is a footprint of that transaction. Invoice details of digital purchases are uploaded automatically to the GST (goods and services tax) portal to file taxes. Hence, as more consumers and small businesses transact digitally, they create digital footprints," Nilekani said.

These footprints, he said, have helped the Reserve Bank of India establish India’s Account Aggregator (AA) system in September.

“What AA does is empower consumers and small businesses to get access to financial services. They can get their bank statements, GST, TDS (tax deducted at source) and other data and request an AA to securely share this with lenders. This process will dramatically democratize lending, as for the first time, this is removing the knowledge asymmetry that is dissociated from small borrowers. They can borrow efficiently, quickly and at low cost—in near real-time," Nilekani said.

“Many banks are already embracing this, and I expect all banks to get on board," he further added.

However, Nilekani warned that lenders must be prepared to switch to lower operating margins to bring about this change.

“You’d go from low volume, high cost and high-value transactions to very high volume, very low cost and small-ticket transactions. This is key to market expansion. You have to lower the transaction cost to be able to reach a wider set of people," he added.

Talking about the AA model, Nilekani said that the use of artificial intelligence and Big Data could help bring more individuals and businesses into the fold of the formal economy.

“Credit using data will fuel more consumption, as well as production. A lot of this will require Big Data and AI, as it’ll require sophisticated algorithms to figure out who is a deserving candidate and who’s a fraud. We will hence see a big push on lending. This is part of a larger process of formalization of the economy," he said.

He also added that the scope of AA is wide and is an already accepted model that awaits adoption. “AA is already approved by the Financial Stability and Development Council (of the finance ministry). The first usage of AA may be with credit, but it will soon extend to personal finance, wealth management and so on."

Nilekani also called on service providers to build consumer-facing portals that are digital-first.

“Consumerization of the user experience is very important. As more people use smartphones and experience the ease of use of everyday apps, they will expect the same experience from financial services. So if we are to attract and retain them, we have to give them an app as simple, intuitive and digital-first as everything else."

Finally, he also spoke about factors that banking providers in the digitization journey should be aware of.

“We will see a shift to the cloud, in combinations of public and private cloud models. This will require a whole new micro-services architecture for banks to implement technologies quickly. Cybersecurity will be increasingly important—as we expose more of our systems to the internet," he said.

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