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Home / Opinion / Views /  Account aggregators could help the country democratize credit

Let us tell you the story of Jigneshbhai, an upstanding resident of a small village in Gujarat who happens to be a money- lender to small businesses. From his strategically-located shop in the village square, Jigneshbhai would observe and map the schedule of his ‘daindaars’ (borrowers), because a change in their routine could portend a change in his cash flows. A slight switch of route or an unscheduled absence would send him into a spiral of worry over the repayment of his funds.

Jigneshbhai and money-lenders like him are experts at judging two crucial components of creditworthiness: the willingness and ability to repay. Intimate knowledge of the lives of their borrowers enables them to ascertain with some accuracy their net worth and reputation for being timely payers. Of course, village gossip plays a major role in providing this intelligence. India is home to hundreds of thousands of Jigneshbhais.

This approach, while extremely effective in a small market setting like a village, is not scalable. This is why, historically, financial service providers (FSPs) like banks and non-bank finance companies (NBFCs) have relied on collateral while making lending decisions. In the absence of collateral, institutions are understandably wary of non-payment and fraud by borrowers.

For the longest time in India, no collateral meant no loan. If loan-seekers were unable to provide adequate assets for collateralization, lenders could not trust them to uphold their end of the contract and could not justify sanctioning loans to them, given the inadequate proof of their ability and willingness to repay.

Demand for credit in India, however, far outstrips institutional supply. FSPs are well aware of this demand. And they have been looking for ways to do what Jigneshbhai does so that they can lend without collateral back-up.

In the absence of collateral pledges, the only way to assess a consumer’s willingness and ability to repay is by examining the prospective borrower’s cash flows. And since FSPs don’t have access to village gossip, they rely on good old bank account statements for that.

Your bank account statement is a digital representation of your financial life. How much money do you make? Where do you spend your money? How many fixed obligations do you have (such as rent, credit card bills and equal monthly instalments for loan repayments)? Do you pay your bills on time? These are all critical inputs to assess your willingness and ability to repay a loan. Especially so in the absence of collateral.

However, this bank account statement-driven process is highly manual, time-consuming, expensive and fraught with potential for abuse. These shortcomings have held back cash-flow based lending for too long in India. Borrowers in the country have been underserved because of the preference for collateralized loans and stymied by cumbersome paperwork when it comes to unsecured loans. New-age lenders have innovated on data acquisition by trawling the SMS in-boxes of users and other methods. This has led to legitimate consumer fears that their personal data might be misused and sold for profits via unauthorized data transfers.

Both FSPs and consumers are in dire need of a seamless digital way of sharing account information.

The account aggregator framework announced by the Reserve Bank of India (RBI) is a new piece of financial infrastructure that promises to solve these problems. It aims to make financial data sharing as easy as making a Unified Payments Interface (UPI) transfer. Imagine being able to share your financial data by just entering a 4-digit PIN and providing consent. No more reams of statement printouts, no more netbanking logins. Just a simple PIN. This is the promise of account aggregation, as envisaged by RBI.

Account aggregators (AAs), with their user interface, will play a pivotal role in closing the trust deficit between FSPs and consumers.

First, they permit users to control who gets access to their data, track and log its movement and reduce the potential risk of leakage in transit.

Second, a single-window format allows user-friendly data movement and reduces the need for physical transfers and post-facto attestations. AAs create a default industry standard for consent that cuts through the dense fine print buried in most privacy policies.

Finally, with the security of this data as a given, AAs allow lenders (or other FSPs for that matter) to rely on a wider selection of data points to determine the trustworthiness of a borrower and their existing track record, thus lowering the risk associated with deploying financial products. More data points and lower risk allow FSPs to craft tailor-made products by innovating on smaller-ticket loans and also offer flexible repayment schedules, thus reducing the likelihood of default. It gives FSPs space to allow businesses with non-traditional models or credit backgrounds to participate in the financial ecosystem.

Through AAs, FSPs have a chance to provide cash-flow based credit, personalized financial management tools, robo-advisory services and many more innovative financial products and services to a wider cross-section of people. For India’s countless aspirational borrowers, their financial data will be the key to unlock access to affordable credit, which would help many of them break away from vicious debt cycles.

We will soon witness a ‘UPI moment’ in data sharing that promises the democratization of credit on an unprecedented scale. By incorporating security, transparency and agility into data sharing, AAs could usher in the most significant transformation of India’s fintech landscape yet.

Sahil Kini & Neeti Bhatt are, respectively, chief executive officer and co-founder of Setu, and a researcher at D91 Labs, Setu’s independent user research division.

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