The Promise of the OCEN-AA Framework for Nano-Entrepreneurs

Nano-entrepreneurs are the smallest and the most underserved category in the MSME segment. They belong to the informal economy and access to credit is their biggest obstacle in growth (Michael and Susan Dell Foundation, 2023). Microfinance seeks to solve this problem in the life of 11 million nano-entrepreneurs in India. The evolution of microfinance and how it can help nano-entrepreneurs was the first part of our research (Jain, 2024.) In this article, we explore the latest innovations in financial technology and how it can alleviate the lack of access to finance for nano-entrepreneurs, in this UPI driven world.

Reasons and Effects of Lack of Access to Finance

Belonging to the informal economy, most of these nano-entrepreneurs operate on thin papers. This means that they do not maintain a proper record of their financial data. This makes it challenging for financial institutions to assess the creditworthiness of nano-entrepreneurs, and they face obstacles in funding due to lack of financial records, inability to provide collateral for loans, inadequate financial knowledge and usage of outdated technology. It is estimated that out of 11 million nano-entrepreneurs, only 5% have access to credit from formal sources and the other majority have to resort to borrowings from friends and family or other informal sources of finance like moneylenders (Goel & Buteau, 2023). Many of the government schemes meant for the MSMEs require collateral or credit history and an acceptable CIBIL score to avail benefits. Therefore, the high cost of maintaining, obtaining and sharing data is one of the biggest reasons behind lack of access to finance.

Account Aggregator – A Novel Beginning

To solve this problem, the RBI, on September 2, 2016, proposed the setting up of an Account Aggregator framework that would act as a consent-based data-sharing platform (RBI, 2022). The Account Aggregator will help consumers share their financial data with third parties in a safe, secure, and cost-effective manner. It provides data to a Financial Information User (FIU) from a Financial Information Provider (FIP) based on the consumer’s explicit consent (Union Bank of India, 2022). Therefore, the Account Aggregator framework consists of the following:

  1. Financial Information Provider (FIP) collects and stores an individual’s data. It is responsible for sharing the consumer’s financial data to the FIU through the AA network with his/her consent. FIPs refer to any regulated financial firm that provides banking, lending, asset management, insurance, and other financial services and products.
  2. Financial Information User (FIU) is an entity that uses data provided by the FIP to provide various financial services to the consumer. For example, a lending bank can use information provided by the FIP to assess whether the consumer should be given a loan or not. FIU can be any organisation regulated by a government regulator like RBI, SEBI, IRDAI, and PRRDA which covers banking, lending, financial planning and investments, insurance, and pensions. (Invest India, n.d.)
  3. Account Aggregators act as an intermediary between the FIP and FIU by facilitating data sharing. They organise all the data and share them after receiving consent from the consumer whose data is being shared. Account Aggregators do not have access to the data. They merely transfer the encrypted data from one entity to another. There are currently 14 account aggregators in India operating under the NBFC – AA licence issued by the RBI and 3 other NBFCs who have received the in principle approval from the RBI. Onemoney was the first NBFC to get the AA licence from the Reserve Bank of India. Cams Finserv, FinSec AA Solutions, and Cookiejar Technologies are other prominent NBFCs who have been given the licence to operate as an Account Aggregator.
  4. Technical Service Providers collaborate with FIUs and FIPs to deliver AA products and services. They develop the foundation modules that connect FIP and FIU modules to the Account Aggregators in the ecosystem.

Eight banks in India had joined the Account Aggregator network- Axis, ICICI, HDFC, IndusInd Bank, State Bank of India, Kotak Mahindra Bank, IDFC First Bank, and Federal Bank were a part of the AA ecosystem at the time of its launch. Currently, there are 200 financial institutions, including private sector banks, public sector banks, and insurance companies, that are a part of the AA ecosystem. In FY2023, about $750 million had been disbursed using the AA framework, and about 50% of the lending has been to the MSME sector. The AA ecosystem has seen explosive growth (Dixit, 2023; Ministry of Finance, 2021; Outlook Money, 2023) which can be seen in the graphs below –

Source: Sahamati

Source: Sahamati

 

We can understand the workings of an Account Aggregator with the help of an example. Let’s say, there is a nano entrepreneur, ‘XYZ’ who wants to expand his business. He applies for a loan in the bank. Now, the banker will have to go through different financial information of the entrepreneur to assess his creditworthiness. The banker may not have access to all the information, and even if he has access, collecting all the information and aggregating it will be a time-consuming and costly process. With the emergence of Account Aggregators, the banker can easily access the detailed financial status of the borrower like his savings, insurance, mutual funds, and earlier loan repayment record through one digital platform. The borrower, XYZ will have to give his consent to the Account Aggregator to share his data with the banker. This framework is better shown in the diagram below.

(Source: Ministry of Finance 2021)

Account Aggregator helps entrepreneurs like XYZ get access to credit by:

  1. Facilitating quick data sharing and enlarging the scope of financial services.
  2. Enabling adequate and secure access to data at a reasonable cost, expediting the loan issue process. 
  3. Helps to make financial and wealth management more effective since all the financial information is stored in one place. 

The DigiSahamati Foundation (Sahamati) is a member-driven industry alliance formed to promote and strengthen the Account Aggregator ecosystem in India. (DigiSahamati Foundation, n.d.). It is a nonprofit organisation mobilising support to financial institutions to adopt technical standards and promote the Account Aggregator network in India. They are also establishing open data governance and legal working groups to innovate on the technology architecture to further protect data rights and drive empowerment. Sahamati provides procedural and best practice guidelines for all participating institutions, support organisations to adopt and go live, and continue to foster innovation in protecting data rights across the AA network through new shared technology building blocks. Sahamati will educate new financial information providers, users, and potential AAs about the DEPA architecture and maintain a dashboard to track the progress of all licensed Account Aggregators in India. 

All entities to be eligible for an Account Aggregator licence have to be regulated by a government regulatory body. The Reserve Bank issues this licence for an entity to function as a NBFC-AA after evaluating the application form of the company.  RBI first gives an in principle approval which is valid for 12 months. Within these 12 months, the entity builds a technological platform to support AA after which the RBI issues a Certificate of Registration (Chittella, 2022). Loan service providers must embed Account Aggregator application programming interface (APIs) into their flow so that they can digitally and securely request for the borrower’s data. Each lender has their own API which they have developed in the 12 months before receiving the Certificate of Registration. To eliminate the time and efforts required by each individual lender to make their API, iSPIRT, a voluntary organisation, created the Open Credit Enablement Network (OCEN) in June 2021. 

Innovative products based on the Account Aggregator Framework

Cash-flow based lending refers to tailored, short term, small sized loans given to entrepreneurs based not on their balance sheet size or assets but on their forecasted time cash flows. (Mulye, 2021). Lenders ask for the transaction history of the borrower and then predict their future cash flows. This solves one of the most important problems of lack of collateral faced by entrepreneurs while borrowing. With the growth of the AA network, lenders are moving from an asset based lending model to a cash flow based lending model. 

Peer to Peer lending is another way entrepreneurs can access credit aided by Fintech. It is an online aggregation platform of lenders and borrowers where individuals directly lend money towards livelihood and education needs of communities removing middlemen like traditional financial institutions from the transaction. Individuals who receive the loans repay it as per a predefined repayment schedule. It provides easy, flexible and quick access to funds for borrowers and higher rate of return to the lenders as compared to the bank FDs. It also provides funds to borrowers at a relatively cheaper rate than banks or financial institutions as it removes middlemen from the borrowing transaction. Rang De is India’s pioneering peer-to-peer lending platform focused on providing timely and affordable credit to unbanked communities. They pioneered social investing by facilitating lending to nano-entrepreneurs like unbanked farmers, artisans and small shopkeepers to kickstart, sustain and grow their  livelihoods. (Rang De, n.d.) LenDen Club, Faircent, Finzy and Lend Box are other prominent players in the P2P segment in India.

RBI is pushing for wider adoption of the AA network by collaborating with the government and forming the Public Tech Platform for Frictionless Credit (PTPFC). This platform gathers and collates the data from various agencies and makes it accessible to the lenders operating through the platform to take credit calls. This will not only help borrowers borrow using minimal paperwork but also reduce the time spent and the cost incurred by the borrowers in lending. Around Rs 3,500 crore worth of loans in agri and MSME have been disbursed through the platform and helped farmers reduce their borrowing costs by almost 30%. (Bhakta, 2024)

The benefits provided by Account Aggregators have acted as a catalyst to promote the concept of Open banking in India. Banks known as neobanks use the data provided by other banks and authorised financial institutions to provide banking services (Razorpay, 2023) This has given rise to the concept of digital banking where banks offer their services of accepting deposits and lending loans using the internet and other technological softwares so that they can penetrate deeper into the rural parts of India (NITI Aayog, 2022) and help bridge the USD 25 trillion credit gap faced by small and medium enterprises (International Banker, 2023)

OCEN is a set of APIs that creates an open network enabling increased collaboration between lenders, borrowers and loan service providers (Bajaj, 2023; ISPIRT, 2021). OCEN aims to improve financial inclusion and democratise credit access. It uses data from revolutionary products like Aadhar, GSTN and UPI to enable borrowers to borrow without providing any collateral. (Chandalavada, 2024) Working in tandem with the Account Aggregator framework, this extension to the public digital infrastructure will provide a common language for lenders and marketplaces to build innovative, financial credit products at scale like cash flow based lending and P2P lending (DigiSahamati Foundation, 2020; Rai, 2023).

Gaps in the AA ecosystem

Lack of technical knowledge among the masses acts as a barrier to adoption of the AA ecosystem. Most of the potential customers have no idea on how and where to start if they want to be part of the AA ecosystem. The small percentage who do have some idea have doubts about the system. Although all the participants in the system are regulated, their concerns are not baseless. As the famous saying goes, “Every coin has two sides”.

Digital lending platforms often lure customers by asking for minimum paperwork but charge rates of interest as high as 100% (Ananth & Menon, 2021; A. Goyal, 2021). These platforms are accused of bullying their borrowers who are unable to repay the loan. These apps ask for access to the borrower’s texts, images, contacts and camera. This data is then used by the lender to harass and bully the borrower. Cybersecurity expert Pravin Kalaiselvan estimated 64 Indians have committed suicide after being threatened by these digital lending app (P. Goyal, 2022).

The benefits of financial inclusion come with the dangers of data breaches. The Account Aggregator framework allows borrowers to share potentially unlimited amounts of their personal data and therefore it is very important to understand the regulatory environment of Account Aggregators. However, there are some efforts being made by the government in this regard. The Data Empowerment and Protection Architecture (DEPA) is a model of data governance launched by the National Institute for Transforming India (NITI Aayog) in August 2020 (NITI Aayog, 2020). It empowers entities to have seamless, secure and full access to their data. This framework gives users the right to give or to revoke the consent given to third-party users of their personal data. (Chittella, 2022). The Account Aggregator consent model is based on DEPA. The Account Aggregators who act as consent managers and facilitate the flow of data from FIP to FIU are data blind. This means that they cannot see or use the borrower’s personal data and only facilitate the encrypted data. Similarly, the Digital Personal Data Protection (DPDP) Act, 2023 has been hailed as the most comprehensive guide on data protection in India. It not only gives individuals the right to give or revoke the consent but also makes entities who store, manage, use and safeguard data accountable for their actions. This ensures that the actions of these entities are ethical and responsible (Prasad et al., 2023). DEPA aligns seamlessly with DPDP giving the Account Aggregator ecosystem a techno-legal look. This privacy along with the government legislations on data protection builds trust in the minds of nano-entrepreneurs.

Conclusion

Credit to entrepreneurs can have a positive multiplier effect on the economy in terms of higher employment, higher capital formation and incomes. Banks on the other hand, can make use of the borrower’s financial data to reduce their non-performing assets and boost profitability. Research shows that lenders can reduce default rates by 50% using AA which will translate to an average increase of 15% in the return on assets of the lender (International Banker, 2023). The OCEN-AA ecosystem helps in collecting non-financial high-frequency data of borrowers and amalgamates them with the financial data provided by the Account Aggregators, making it truly a UPI moment of lending. This intersection of technology and finance needs to be effectively managed and regulated for Account Aggregators to achieve their mission of financial inclusion through lower costs of data. The achievement of this goal requires the joint collaboration of people and organisations belonging to different backgrounds like finance, law, technology and public policy.

 

Hrishikesh Jain is a student of Gokhale Institute of Politics and Economics, Pune, and interns with Centre for Excellence in Entrepreneurship and Development (CEED).

 

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