SFS 2022: Simplifying MSME Lending via Account Aggregator

AA simplifies information sharing, which has been a big challenge for SMEs compared to large enterprises due to lack of infrastructure and provide information that lenders will provide

Photo by rupixen.com on Unsplash

The Account Aggregator Framework is an effort by the Reserve Bank of India (RBI) to enable an open banking ecosystem in which different entities, ranging from lenders to marketplaces to financial institutions, are connected via a single network. Credit underwriting can take place easily which the MSMEs can get unsecured loans at rates that are lower than those available through traditional lending models. This panel discussion with Nirav Choksi of CredAble and Rohit Mehta of Akasa Finance Ltd. (formerly known as Pooja Finelease Ltd) discuss how MSMEs can benefit from this framework and usher in a new era in which credit is not only easy but also affordable. The session was moderated by Berkha Oberoi of Abhyuday Bharat Mega Defense Cluster LLP.

As per Nirav, AA framework is a gamechanger move. Today’s scenario lending to MSMEs is moving towards cash flow-based lending. Access to their bank account is critical, and AA will enable that and align to cash flow-based lending. In addition, AA simplifies information sharing, which has been a big challenge for SMEs compared to large enterprises due to lack of infrastructure and provide information that lenders will provide, Nirav said.

Access to GST data and bank statements under one framework is compelling for running analytics and enabling large-scale lending. Moreover, it will bring mainstream financial institutions to lend to small businesses, which has been a challenge and get better rates for MSMEs.

It’s a win-win situation for all players involved, and it’s a stellar move by the RBI, Nirav said.

It’s a move towards democratising credit to small businesses. In addition, having access to cash flow data periodically enables lenders to lend more safely and manage risk better. So it’s overall a win-win situation for everyone.

SMEs are the main drivers of the growth engine, and till now, they had a problem in getting funding, or the rate of interest they would typically get would be higher than any corporate. Lenders didn’t have enough information for successful credit underwriting for any SME, as per Mehta of Akasa Finance.

AA allows lenders to get financial information in one place and becomes easy to analyse the creditworthiness of the SME. Once this happens, lenders are more open to lending to these institutions, which was not possible earlier. Any business requires liquidity to grow, and it had gone to more prominent players who didn’t actually need money. Just because some lenders cannot decide creditworthiness, it doesn’t mean they are not creditworthy, and it’s just that there’s some information gap that hinders making that decision.

AA framework is a great move that brings all data in one framework to speed up credit decisions. A score can be derived and supports existing decisioning infrastructure; it becomes easier for the lender to SMEs, so the money flows.

Much traction is coming in and growing as data algorithms grow with time.

While it’s early days, let’s understand the AA framework would throw data in a raw form, and lenders would need to build credit analytics on top of it to underwrite, and all that work has been done, as we speak, Nirav said. Over the next couple of quarters, it will start taking shape. Many fintech companies like us are building technologies to harness this data and create solutions for banks and other lenders to use the data effectively to underwrite, according to Nirav.

The second thing that will happen is the cost of operations, and customer acquisition cost will go down, simply because traditional ways were physical. Over the last few years, it’s transitioning into digital, and AA would be in its entirety digital. As a result, banks will be able to do straight-through processing for SMEs without going through a physical process, and banks will be able to offer competitive rates, as per Nirav.

All of this will come into effect in the coming quarters, and once all aggregators are integrated with all banks, the traction will start growing further.

AA will be more efficient as everything is digitised, and it further becomes easier to run analytics on it. In contrast, it still happens in a physical or manual process in many cases. As a result, SMEs will be able to draw in more funding than they could do before, according to Rohit.