How data can change lending experience in India?

When it comes to digital lending, data is not enough. In the Indian digital lending ecosystem, there has been a race to collect more and more data about borrowers because the theory goes that more data will lead to more loan disbursements. However, data is just the beginning of a strong lending process, not the end of it.

Here’s how.

Business success for companies offering digital credit hinges on more than just the amount of data. It’s the quality of underwriting as well as richness of the said data that makes lending work. Additionally, it’s the borrowers who will experience the biggest leap in their entire experience with the financial institutions.

This is being made possible with the evolution of innovative underwriting that’s being powered by recent data innovations as well as some clever risk modelling at the fintechs which are now at the forefront of distributing digital credit in the country.

However, the loan is still the responsibility of the lender or the NBFCs writing it on their balance sheet. For the risk teams to sleep peacefully at night, it’s imperative that a lender is highly confident in its ability to assess borrowers properly. At the same time, the concerns of profitability also creep in because more assessment usually means more manpower.

So what does it take for a lender and/or a fintech to build the strongest borrower assessment process while ensuring seamless borrower experience?

At the very least, a comprehensive look into multiple transactions linked to several bank accounts. For a truly holistic assessment, you’d have to add pensions data, tax data, insurance data, and securities data to the list.

It’s not an easy process, bringing together these data sources and assessing them efficiently. For the borrower, it entails sharing physical and scanned copies of bank statements, notarizing relevant documents, and sharing passwords to give third parties access to financial history. For the lender, it involves making sense of disparate data sources through a time-consuming process that’s prone to errors.

Data plays a key role in improving access to low-cost, customizable financial products and thereby driving financial inclusion. The smooth 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 essential part of this process.

That’s where the Account Aggregator (AA) comes in. Account Aggregators are an RBI-approved Non-Banking Financial Institution that works as a technology intermediary between the FIP and FIU. Banks create an API for every product they offer - from deposits to credit cards - and these APIs connect with Account Aggregators to send information as FIPs and receive information as FIUs.

This will replace the time-consuming processes mentioned above with a safe, mobile-based digital data sharing process - which marks the first step towards introducing open banking to India.

In the Account Aggregator ecosystem, which was launched in September 2021, data is shared with the FIU with complete and transparent consent from the user, who has the ability to revoke this consent at any point. Amid continuing concerns around data privacy in the digital age, Account Aggregators ensure the security of any data collected and shared.

In 2019, the Government announced its ambitious vision of making India a $5 Tn economy by 2025.  However, lending to both businesses and individuals must scale rapidly for that vision to become a reality.

Account Aggregators play a critical role in expanding access to credit for new-to-credit customers and enterprises. MSMEs in particular have limited access to formal credit, considering almost 85% of the businesses are unregistered. This lack of formal data and credit history would otherwise exclude them from the formal banking system.

However, even these segments who have traditionally been left out of formal credit have a comprehensive digital footprint resulting from transactions on various payment apps.

With the help of Account Aggregation framework, these small businesses can share financial footprint and transaction data with lenders who can underwrite them based on cash-flows, online spending behavior, tax returns and more.

By minimizing the need for paperwork and separate submissions, Account Aggregators enable quicker, more efficient data sharing. This allows lenders to assess borrowers and process loan applications faster with no compromise on data security or quality. What’s more, continuing data sharing with lenders may also work to make them more comfortable with lending to new-to-credit customers.

With the arrival of the Account Aggregator ecosystem, the borrower assessment has not only become faster but it’s also become more reliable. First, the AA data is tamper-proof unlike manual upload of bank statements. Second, with mobile data or digital footprints collected by lending apps, AA can help quickly identify a pool of prequalified borrowers, thus saving them time and lenders costs. Third, with high quality aggregation of financial, transactional, personal and other data in technology driven lending ecosystems, the risk modelling is set to only become stronger with time.

It is hoped that all of this will work in tandem to reduce delinquencies and give lenders as well as fintechs more confidence in offering loans going further.

The Account Aggregator framework, when combined with in-context credit that’s offered on apps and digital platforms, will do for lending what UPI did for payments. It will enable instant, small ticket-size loans with ease and minimal documentation.

Embedded Credit providers who leverage Account Aggregators can now underwrite borrowers faster and better with a unified view of their financials.

Together, these advancements will go beyond simply improving the lending experience. Credit can finally come to those who need it most - the first time borrowers outside of urban India, the first-generation entrepreneur, and your local neighborhood kirana store.