This article has been contributed by Mr. Ram Kewalramani (Co-founder & Managing Director of CredAble). CredAble provides working capital and related liquidity programs for enterprise supply chains, leveraging its trade finance expertise, partnerships with capital providers, and its world-class technology platform.
What is the Account Aggregator Network?
The Account Aggregator network is a platform that is regulated by the RBI with an NBFC-AA license. This facilitates sharing information of an individual from a financial institution that they hold an account with to any other regulated financial institution that is registered in the AA network. The AA system makes sure that this sharing of information is done securely and digitally.
The AA system has been launched with the basic idea that customer data is generally fragmented and exists in the databases of banks, insurance companies, lenders, and government entities in bits and parts. The AA network aims to provide an organized framework for effortless and safe data sharing digitally. This data sharing can happen between a bank and a borrower for credit access. So, instead of wasting time in collating data from bank statements, hard copies, stamped documents, etc., individuals, SMEs, and MSMEs can get it all in one place.
The RBI has maintained that these AA systems are a new kind of NBFCs that offer account aggregation services to their customers, in return for a fee. With this system, the user or a small businessman now will not have to physically share the scanned documents from various financial organizations and entities, browse through different sites looking for information that is required by financial service providers.
How are SMEs and MSMEs going to benefit from this AA system?
The AA system has the potential to facilitate smooth credit to small-scale and local businesses. For example, instead of having to physically collate data and information in order to obtain a loan, MSMEs can have access to a small formal credit with the help of this credit underwriting. Till now, sharing information had always been a long process that required a lot of paperwork. The lack of organized records of financial statements used to push small-scale businesses to avail loans or credit through informal and unreliable channels. Out of the 6.33 crores MSMEs in India, only 10% of them had access to formal credit. By sharing and collecting data digitally, a credit decision is expected to be a lot faster and reliable for MSME lending.
The AA system will potentially reduce the loan application cycle to just a few minutes to facilitate faster disbursal of loans to small business owners. Since AA is now making it possible to share credit-worthiness proxies, it will encourage other small-scale businesses and therefore will bring more and more people into the business.
Before the AA system was introduced, MSMEs and SMEs had limited access to capital as banks and lenders felt it was too risky to loan money to these businesses. Also, the cost of processing small loans was very high for the banks. Within the framework of the Account Aggregator system, access to data has become more democratic, which lets capital underwriters have access to a huge set of data and hence gives them options to choose from borrowing options at great rates.
One of the major problems for small and micro industries was that they could not provide systematic data to raise capital. Their balance sheet is almost never tallying, which makes it impossible for them to get a loan. The AA system is an excellent addition to the digital infrastructure of India. This will allow banks to reduce their transaction costs, and that will enable banks to offer small loan amounts and more specific products and services.
What are the benefits of using the AA facility?
As an NBFC, the AA system will be the one-stop destination for the collection and transfer of data. As a result, banks will focus more on underwriting their customers. Using this framework, banks will also have access to alternate data
When more and more loan service providers or LSPs will join the AA network, they can be potentially sharing data of cash flow and transactions, as a result of which, banks can supplement traditional underwriting methods with cash-flow-based data.
This in turn would let banks not only offer smaller loans to MSMEs but would also help them reach out to a wider set of customers and businesses whose loan applications they might have rejected in the past.
The Account Aggregator system is introduced and implemented by the RBI in order to encourage small-scale and micro small-scale local businesses to get loans and raise capital for their growth and expansion. It packs in numerous other benefits, which will reach out to a lot of individuals and other customers and will potentially make the loan application and processing methods faster, easier, and much less costly. This is the future of NBFCs that will revolutionize the digital finance system of India.