How can data change the lending experience in India?
When it comes to digital lending, data is not enough. In India’s digital lending ecosystem, there has been a race to collect more and more data on borrowers, as the theory is that more data will lead to more loan disbursements. However, data is just the start of a strong lending process, not the end of it.
The business success of companies offering digital credits doesn’t just depend on the amount of data. It is the quality of the subscription as well as the wealth of said data that makes the credit work. In addition, it is the borrowers who will experience the greatest leap in their overall experience with financial institutions.
This is made possible by the evolution of innovative underwriting which is fueled by recent innovations in data as well as intelligent risk modeling in fintechs which are now at the forefront of digital credit distribution in the country. .
However, the loan remains the responsibility of the lender or the NBFCs which enter it in their balance sheet. In order for risk management teams to sleep peacefully at night, it is imperative that a lender be very confident in their ability to properly assess borrowers. At the same time, concerns about profitability also creep in, as more evaluation usually means more manpower.
So what does it take for a lender and / or fintech to have the strongest borrower review process in place while ensuring a seamless borrowing experience?
At the very least, a complete overview of multiple transactions related to multiple bank accounts. For a truly holistic assessment, you need to add pension data, tax data, insurance data, and securities data to the list.
It is not an easy process, gathering these data sources and evaluating them effectively. For the borrower, this involves sharing physical and scanned copies of bank statements, legalizing relevant documents, and sharing passwords to allow third parties to access financial history. For the lender, it’s about making sense of disparate data sources through a tedious and error-prone process.
Gather various data sets
Data plays a key role in improving access to low-cost, customizable financial products and thus promote financial inclusion. The proper sharing of information between the financial information provider, or FIP, (IT department, banks, asset management companies) and the financial information user, or FIU, (the lender), is an element essential to this process.
This is where the Account Aggregator (AA) comes in. Account aggregators are an RBI-approved non-bank financial institution that serves as a technological intermediary between the FIP and the FIU. Banks create an API for every product they offer – from deposits to credit cards – and these APIs connect to account aggregators to send information as FIP and receive information as CRF.
This will replace the tedious processes mentioned above with a secure, mobile device-based digital data sharing process, which marks the first step towards the introduction of open banking in India.
In the Account Aggregator ecosystem, launched in September 2021, data is shared with the FIU with the full and transparent consent of the user, who has the option to revoke that consent at any time. Amid persistent concerns about data privacy in the digital age, account aggregators keep all data collected and shared safe.
Expanding access to credit
In 2019, the government announced its ambitious vision to make India a $ 5 billion economy by 2025. However, business and personal lending must evolve quickly to make this vision a reality.
Account aggregators play a critical role in expanding access to credit for new customers and businesses. MSMEs in particular have limited access to formal credit, as almost 85% of businesses are unregistered. This lack of formal data and credit history would otherwise exclude them from the formal banking system.
However, even those segments that have traditionally been excluded from formal credit have a full digital footprint resulting from transactions on various payment applications.
With the help of the Account Aggregation Framework, these small businesses can share their financial footprint and transaction data with lenders who can underwrite them based on cash flow, online spending behavior, tax returns , etc.
By minimizing the need for paperwork and separate submissions, account aggregators enable faster and more efficient data sharing. This allows lenders to assess borrowers and process loan applications faster without compromising on data security or quality. Additionally, the ongoing sharing of data with lenders can also help make them more comfortable with lending to new customers.
With the advent of the Account Aggregator ecosystem, borrower assessment has not only become faster, but it has also become more reliable. First, AA data is tamper-proof unlike the manual upload of bank statements. Second, with mobile data or digital fingerprints collected by lending apps, AA can help quickly identify a pool of prequalified borrowers, saving them time and money for lenders. Third, with high-quality aggregation of financial, transactional, personal, and other data in technology-driven lending ecosystems, risk modeling will only get stronger over time.
It is hoped that all of this will work in tandem to reduce delinquencies and give lenders as well as fintechs more confidence to offer loans further.
Enable a new paradigm of financial transactions
The Account Aggregator framework, when combined with the contextual credit offered on apps and digital platforms, will do what UPI has done for payments. It will allow instant loans of small tickets with ease and minimal documentation.
Integrated credit providers who take advantage of account aggregators can now underwrite borrowers faster and better with a unified view of their finances.
Taken together, these advancements will go beyond simply improving the lending experience. Credit can finally come to those who need it most – first-time borrowers outside of urban India, the first generation entrepreneur, and your neighborhood Kirana store.
The author, Rajat Deshpande, is co-founder and CEO of FinBox. Opinions expressed are personal