Sheikh Nissar
Financial Information Users (FIUs)
A financial information user is a lending institute which upon the consent of the borrower, retrieve machine readable format of data from FIPs, and analyze the data for the lending decisions. The data shared is revocable. FIUs may be banks, NBFCs, etc. The data shared can be used only for the purposes declared in the data-sharing agreement. If a barrower is not satisfied with a lending institute or user, the borrower has full authority over data to revoke it. It is also pertinent to mention that an FIU cannot forward data or trade this data with other institute.
Account Aggregators (AA)
AA are RBI regulated entities that assist FIPs to share financial information in a digital format and FIUs to use that information in real-time, with the consent of the owner of the data. AAs are blind pipes of exchange between FIP and FIU. AAs do not store data.
Process of Data Aggregation
The interconnectedness of multiple accounts have potential ability to bring together data from vivid sources on a single platform for its effective use. The revolution in information technology has brought paradigm shift in consumer expectations of speed, safety and security, demanding a newer system that would provide an easy access to financial data without visiting number of institutions, signing cumbersome papers and waiting in long serpentine queues. The account aggregation or financial data aggregation is technique that involves the collection, assembly and synthesis of information from multiple sources such as banks, mutual funds, pension funds, provident funds, income tax returns, e-commerce, etc.
Account Aggregators will integrate multiple sources of data to a single platform. When a customer is looking for a loan or any other financial product that require their financial information to be collated, the customer via AA of his choice will allow FIPs to share his financial information with FIUs ( the lender who is appraising loan application of the borrower) in encrypted form. In this whole process, the FIs and other offices act as FIPs, lenders act as FIUs and NBFC-AAs act as medium of communication between the lender and the borrower.
Need of Account Aggregators
The credit history of an applicant determine whether a lender can grant a loan to applicant or can deny. Credit scores are built by credit history. The three digit score tell a lender about the repayment behavior of the borrower. A good score may motivate an appraising official to grant a financial instrument and a low score may refrain him from granting a loan. The new-to-credit applicant have no credit history or minimal credit history. Here an appraising official are in a real fix: neither he/she have enough credentials to grant loan nor he/she have enough reasons to reject an application. Similarly, existing borrowers face many challenges in before disbursement of loan. The challenges faced by borrowers are:
Lengthy procedures.
Emphasis on credit history.
Collateral Requirement.
With the introduction of AA System, the credit worthiness of borrowers who have no credit history may be detected through various other data points on assets held by the borrower. In account aggregator system, the FIPs will provide financial information to FIUs on consent of the borrower, through channel called AA System in encrypted format; avoiding lengthy procedures and thus moving from physical collateral to informational collateral. By sharing information of assets, the potential borrowers who lack credit history will now be able to prove their credit worthiness and can avail credit without lengthy procedures or physical collaterals.
Credit Information Companies (CICs) and Account Aggregator Ecosystem
Credit score is an important metric used by lenders to evaluate a potential borrower’s credit worthiness. It is statistical method to ascertain the likelihood of an individual or entity paying back the money. Credit Information Company (CIC) assign to an organization or an individual a 3-digit score that determines the credit worthiness of an organization or individual. In simple words, CIC analyses the debtor’s repaying capacity i.e. possible credit risk associated with a financial instrument to an organization or an individual. Needless to say, a good credit score depicts a good history of repaying loans on time in the past. For a lender, a good credit score influences the decision of approving a loan application. Although, it is a history, yet a good credit score assures a lender that the applicant will meet payment obligation in future and a poor credit score refrains a lender. Therefore, the credit information report (CIR) plays a key role in lender’s decision to offer credit. Albeit, the TransUnion CIBIL was first CIC in India and has highest market share. The four popular CIC among lenders as well as borrower are TransUnion CIBIL, Experian, Equifax and CRIF Highmark.
Although, account aggregator framework has opened new era of lending in our country, yet the credit information report (CIR) cannot be ignored. Account aggregator system may help lenders to evaluate new as well existing borrowers on the basis of informational collaterals while CIR has repayment history that makes it as important as AAs. To evaluate an existing customer’s behavior on repayment obligations, the credit information report is necessarily required. An appraising official would not rely only on a fair collateral, rather more emphasis would be laid on repayment history.
Account aggregator framework as well as credit information report, both, are easily accessible tools in the hands of evaluator to access the repaying capacity of borrower. Therefore, an appraising official would rely on both but the CIC would have been in fix after inception of AAs and would be thinking of upgrading for survival.
A Potential Game Changer
The unprecedented growth of FinTech industry in India and efficiency of new market entrants has aroused the competition. According to estimates by Boston Consulting Group (BCG), the FinTech industry will grow three fold in next five years, surpassing $150-$160 billion mark by 2025. Account Aggregator Framework will eliminate the data monopoly of digital and financial companies by handing over greater control over data (personal and transaction) to the individual. AAs have potential to revolutionize the lending and enable the integration of more people into the formal credit system.
The Account Aggregator Ecosystem aims at disrupting the cumbersome paperwork to unlock the power of financial assets. If a person or MSME is dire need of credit, the lender bank will rely upon the lengthy bank statements/balance sheets, physical collaterals, as a proof. These documents need scores of signatures to be presented as repayment guarantees and there would be number of reconfirmations for these documents. And, even if a potential borrower is a new-to-credit, who have no credit history, the appraising official will hesitate in granting any financial obligation. AA Ecosystem has been designed to encourage appraising official or lending institution to extend credits to the new-to-credit (potential borrowers) who have good asset side but no credit history (repayment behavior). Thus, AA system will be a game changer in onboarding potential borrowers who were denied credits due to lack of credit history.
Sheikh Nissar can be reached at sheikhnissar@outlook.com
Opinions are personal.
