How account aggregators can bring an era of democratised credit

Despite the expanding presence of banks and Non-Banking Financial Companies (NBFCs) in remote Indian markets over the last decade, the percolation of credit to a pool of borrowers lacking any credit history has been made possible recently. With the launch of the Account Aggregators Framework, the Reserve Bank of India (RBI) has licensed it to democratize credit in a way that bridges the gap between available financial lending and millions of small credit borrowers in India.
Account aggregators are entities that allow individuals to share and access data from one financial institution to another in the consolidated networks of account aggregators. These aggregators have received approval to access and share data by the RBI.

Structured as NBFCs, account aggregators would disrupt the borrowing system from institutionalized financial institutions that make money on having custody of the borrower’s financial data. With the launch of this mechanism to make credit availability easy, the big business of packaging, analyzing, and selling financial information would be disrupted, just as UPI disrupted the e-wallet business. India’s eight largest banks, including ICICI, Axis, and HDFC have started making loans available via the account aggregator system. This has made lending faster and cheaper.

How do account aggregators work?
Account aggregating collects an individuals or household's financial data to make it available in the market. It allows customers to aggregate data on all their financial assets within a single financial institution. Customers may have to provide these institutions with their account credentials (username and password) should they wish to avail the personal finance service. The data is then stored in the account aggregation software, allowing access to balance information and transaction records. Besides the financial information, collected additional net-worth of the borrower such as property valuations, debt liabilities, and cash inflows and outflows may be brought together by financial advisors on behalf of their clients. The borrower can also avail services such as access to loans and access to money management if their banks join the AA network of data sharing.

Account aggregators as facilitators of small credit
Several parameters govern the process of making credit available to a borrower by banks/NBFCs, and having a credit history is one of them. Therefore, for first-time borrowers or borrowers of personal credit with minimal to zero financial records available, getting credit from banks and NBFCs is tough. Moreover, credit available is limited for those whose income is not fixed, like a self-employed individual whose income depends on erratic payments from clients or small business owners whose revenue fluctuates every month. In the absence of credit history or proof of income, access to loans and personal finance services is even more challenging. Not to mention, credit institutions often require borrowers to pledge collaterals to avail of credit facilities, which is again a deterrent for small personal credit seekers.

But with the introduction of account aggregator service, the creditworthiness of such borrowers may be detected through various other data points on assets held by the borrower, which would serve as the basis of extending personal credit. Borrowers who have access to online banking may also avail of quick credit without pledging any collateral through finance software apps that provide aggregation services like Quicken or Mint.

Credit facilities, with the launch of account aggregator service, shall enhance and cater to the largely untapped pool of potential borrowers who might constitute the base of loyal customers for a particular banking service. This would make credit accessibility a real deal for people from all strata of Indian society.

(The writer is co-founder, Eko)