Jigneshbhai and lenders like him are experts in judging two crucial elements of creditworthiness: willingness and the ability to repay. An intimate knowledge of the lives of their borrowers allows them to determine with some precision their net worth and their reputation as one-time payers. Of course, village gossip plays a major role in providing this information. India is home to hundreds of thousands of Jigneshbhais.
This approach, although extremely effective in a small market such as a village, is not scalable. This is why, historically, financial service providers (FSPs) such as banks and non-bank financial corporations (NBFCs) have relied on collateral to make lending decisions. In the absence of collateral, institutions are naturally wary of non-payment and borrower fraud.
For a very long time in India, no collateral meant no loan. If loan seekers were unable to provide adequate assets for collateral, lenders could not trust them to meet their end of contract and could not justify granting them loans, given insufficient evidence. of their ability and willingness to repay.
The demand for credit in India, however, far exceeds institutional supply. PSF are well aware of this demand. And they looked for ways to do what Jigneshbhai does so that they could lend without collateral.
In the absence of collateral, the only way to assess a consumer’s willingness and ability to repay is to look at the potential borrower’s cash flow. And as the PSF do not have access to village gossip, they rely on good old bank statements for this.
Your bank statement is a digital representation of your financial life. How much money are you making? Where do you spend your money? How many fixed obligations do you have (such as rent, credit card bills, and equal monthly payments for loan payments)? Are you paying your bills on time? These are all essential inputs in assessing your willingness and ability to repay a loan. Especially in the absence of a guarantee.
However, this process based on bank statements is very manual, time consuming, expensive and has the potential for abuse. These shortcomings have held back cash flow based lending in India for too long. The country’s borrowers have been underserved due to the preference for secured loans and hampered by the cumbersome red tape when it comes to unsecured loans. New era lenders have broken new ground in data acquisition by browsing users’ SMS inboxes and other methods. This has led to legitimate consumer fears that their personal data could be misused and sold for profit through unauthorized data transfers.
FSFs and consumers urgently need a transparent digital way to share account information.
The account aggregation framework announced by the Reserve Bank of India (RBI) is a new financial infrastructure that promises to solve these problems. It aims to make sharing financial data as easy as performing a UPI (Unified Payments Interface) transfer. Imagine being able to share your financial data just by entering a 4-digit PIN code and giving your consent. No more printing of statements, no more netbanking connections. Just a simple PIN code. This is the promise of account aggregation, as envisioned by RBI.
Account aggregators (AAs), with their user interface, will play a central role in bridging the trust gap between PSPs and consumers.
First, they allow users to control who has access to their data, track and record their movements, and reduce the potential risk of leakage in transit.
Second, a one-stop-shop format enables user-friendly data movement and reduces the need for physical transfers and post-facto attestations. AA creates an industry default standard for consent that eliminates the dense fine print buried in most privacy policies.
Finally, with the security of this data being acquired, AA allows lenders (or other FSPs for that matter) to rely on a wider selection of data points to determine a borrower’s reliability and track record. existing systems, thereby reducing the risk associated with the deployment of financial products. More data points and less risk allow FSPs to design tailor-made products by innovating on lower-priced loans and also offer flexible repayment schedules, thus reducing the likelihood of default. It gives FSPs a space to enable companies with non-traditional credit models or histories to participate in the financial ecosystem.
Through AA, FSPs have the ability to provide cash flow-based credit, personalized financial management tools, robo-advisory services, and many other innovative financial products and services to a wider range of people. For India’s countless ambitious borrowers, their financial data will be the key to unlocking access to affordable credit, which would help many of them break the vicious circles of debt.
We will soon see a “UPI moment” in data sharing that promises the democratization of credit on an unprecedented scale. By integrating security, transparency and agility into data sharing, AA could usher in the most significant transformation of the Indian fintech landscape to date.
Sahil Kini and Neeti Bhatt are CEO and co-founder of Setu, respectively, and a researcher at D91 Labs, Setu’s independent user research division.
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