The Pradhan Mantri Jan Dhan Yojna (PMJDY) has revolutionized the system of financial services for the poorer part of society. The program is a step towards holistic financial inclusion, with features such as no minimum balance requirement for a bank account, the possibility of direct cash transfer, access to Rupay debit cards and the retirement. As we complete 7 years of this initiative, its success should be celebrated for bringing over 430 million beneficiaries, with ₹1.451 trillion balances, under the banking system.
Easy and affordable access to credit and insurance for citizens is the key to global financial inclusion. According to a report by the International Finance Corporation on MSME finance in India, 80% of small business demand for addressable credit is met by informal financial sources.
This has been a key objective of the PMJDY mission as the next step towards financial inclusion. Individuals today must have physical collateral and often have to run from pillar to post with bank statements, notary-stamped documents, tax returns and cash flow statements to secure a loan. Since individuals’ financial records are scattered across different organizations, it becomes difficult for them to consolidate all of these statements when applying for credit. For example, deposit receipts are kept with banks, life insurance documents are, for example, with the Life Insurance Corporation and details of investments in mutual funds with asset management companies .
Complementing the PMJDY, India recently unveiled the Account Aggregator (AA) Network to overcome the challenges of accessing microcredit for individuals and Micro, Small and Medium Enterprises (MSMEs). An account aggregator allows financial records to be securely shared, after obtaining the individual’s consent, with financial service providers to access small amounts of formal credit. For example, when an individual or business applies for a bank loan, an AA may obtain the applicant’s consent and collect information about bank accounts and other financial assets to share with other financial institutions within the AA network. Through access to financial records, lenders can establish eligibility for a loan. Since financial data is shared electronically by institutions through the AA, forged documents are not an issue.
If a hotel owner wants to take out a loan to renovate a property, they can share bank statements for the last five years with the lender. With these details, the lender will be able to determine the owner’s creditworthiness and provide a microloan.
The AA network is therefore a paradigm shift from physical collateral to informational collateral. It will unlock access to affordable credit in a simplified and reliable way. This will reduce the transaction cost and time needed to sanction loans, make smaller loans more feasible for banks, and enable them to provide more innovative personalized loans and financial products.
An AA is an entity regulated by the Reserve Bank of India (RBI) (with a non-bank financial company-AA license). The system has three components: Financial Information Users (FIUs), Financial Information Providers (FIPs) and Account Aggregators. The AA acts as an intermediary that collects information from FIPs that hold a user’s financial data, such as banks, and shares it with FIUs, such as credit agencies. The future plan is to make all financial data related to taxes, pensions, investments and insurance available on the network.
User privacy protection is rooted in the network. It was developed on a consent mechanism that requires permission from the individual to share data with an FIU. The consent method is designed on the principles of our Data Empowerment and Protection Architecture (DEPA), a policy proposed by Niti Aayog. Second, data shared on the AA network is end-to-end encrypted. It is encrypted by the sender and can only be decrypted by the recipient. Third, AAs are not allowed to store, process and sell customer data. These design principles ensure that ownership of data belongs to individuals and is not monetized, so that no conflict of interest arises when data is shared on the AA Platform to provide better financial services. This is fundamentally different from the design principles of large global tech companies that retain consumer data to monetize it.
The aim should be to expand and expand the adoption of the AA platform in India. All stakeholders in the AA ecosystem must play a central role in this regard. Four apps – Finvu, OneMoney, CAMS Finserv and NADL – have working AA licenses. Three more have received RBI’s approval in principle (PhonePe, Yodlee and Perfios) and are expected to launch apps soon. AAs should focus on marketing and publicizing the services they provide. The growth of these apps will drive the growth of the entire AA ecosystem. Second, since the four apps are only available on Android smartphones, AA should develop intuitive apps for feature phones. If AA network services are made available on feature phones, it will prove transformational in reaching out to a large group of individuals and businesses. Third, eight major banks – State Bank of India, ICICI Bank, Axis Bank, IDFC First Bank, Kotak Mahindra Bank, HDFC Bank, IndusInd Bank and Federal Bank – have joined the network. The process of integrating other FIPs, such as the Goods and Services Tax Network (GSTN), insurance companies, national pension system, etc., needs to be accelerated. Projects to integrate non-financial players such as health and telecommunications companies into the network should also be accelerated. Fourth, any technical issues on the platform should be resolved quickly to build trust in the AA ecosystem.
India-born technology platforms – Aadhaar, Unified Payments Interface, Government e-Marketplace, DigiLocker and GSTN – are gems of India’s tech landscape and examples of how technology can be leveraged for citizen services . The AA network may be a new feather in the hat that would help India formalize credit and spur economic growth in the post-covid era.
These are the personal opinions of the author.
Amitabh Kant is Managing Director, Niti Aayog
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