Three years since the Reserve Bank of India (RBI) launched the AA framework— a financial data-sharing system aggregating a customer’s financial information in one place, more banks are offering this facility to customers.
It is not only helping individuals to view all their savings in one place and track their spending habits, but it is also enabling banks to sanction loans to customers who are yet to build their credit history. Experts say the AA framework will help banks to sell non-loan products to individuals such as insurance and mutual funds.
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Credit cards, loans
Banking executives say giving credit cards or small-ticket loans has become a lot more seamless after the adoption of AA framework.
“We can easily issue credit cards or loans to any non-Axis Bank customer. The customer can digitally share his or her bank statement through the account aggregator ecosystem. And we will underwrite it in real time. The loan disbursal can happen as soon as the customer does his video KYC (know your customer, a verificationprocess) with us,” says Sameer Shetty, president and head—digital business and transformation, Axis Bank.
“Once you share with us the details of your Aadhaar and PAN (the permanent account number issued by the income tax department), we will ask you for your AA id, which will be validated through a one-time password (OTP) and customers can then select the bank, details of which they want to share with us,” he says.
Federal Bank is also integrating the AA ecosystem for non-bank customers who are looking for credit cards, personal loans and auto loans.
“We are currently in the testing phase, but should be launching this in the next financial year,” says Jithesh PV, vice-president and head digital, Federal Bank.
The bank also plans to use GSTN (goods and services tax network) within the account aggregator framework for lending to micro, small and medium enterprises (MSME). Jithesh says this will first need to be tested before its implementation.
GSTN integration will help banks to offer MSME loans, as GST return filing also includes invoice-level reporting, which has turnover and cash flow data.
Jithesh expects the major use-cases of AA framework to be in unsecured lending, at least for now.
On the home loan front (a secured lending product as it entails loan against a collateral), banking executives say the AA framework can be used to vet the bank account or income statement of the borrower. However, it can’t replace the entire process.
“For home loan, the process is not fully digital as there is a creation of security for loan. The process requires physical inspection of the property and reviewing several other documents, apart from bank statements,” Shetty says.
As the bank account statement is coming directly through an RBI-regulated entity, it provides comfort to the banks.
The participants
There are three main participants in the AA ecosystem, a RBI-licenced non-bank financial company (NBFC) that acts as an AA, financial information providers (FIPs) and the financial information user (FIUs).
Entities that are regulated by various financial regulators—RBI, Securites and Exchange Board of India, Insurance Regulatory and Development Authority of India, Pension Fund Regulatory and Development Authority —can act as FIUs. In other words, only regulated entities can access the AA ecosystem to use a customer’s financial data.
The AA framework aims to get all kinds of financial data in one place, including investments; loan against mutual funds or loan against securities is another lending product that can get a boost from this.
“Once this gets implemented, banks would be able to easily assess the value of investments held by the borrower, across different investment types—mutual funds, equity shares, bonds, etc,” says Ramgopal Subramani, chief strategy officer of Perfios. Perfios Account Aggregation Services is an RBI-regulated AA.
Over time, as financial institutions can access more data, this would further digitize their product offerings. Adhil Shetty, chief executive officer of Bank Bazaar, points out that Digilocker is pending integration with the income tax (IT) department and, once this happens, it would complement the AA framework well.
“This would give financial intermediaries such as banks quick access to TDS (tax deducted at source) details through form 26AS and income statement through form 16, which is another layer of data for lenders,” he says. This would allow banks to underwrite more types of loans.
Insurance
Insurers are also using AA framework to underwrite insurance on the fly. Explaining the process, Sandeep Kushwaha, senior vice-president and head of analytics, Aegon Life Insurance, says earlier we required concrete income proof, salary slips of salaried persons or ITR (income tax return) of self-employed individuals to determine their insurance eligibility.
“However, with AA framework once the customer gives his or her consent, we can just access their account statement from their respective banks and offer them insurance policies instantly,” Kushwaha says.
This has also led to great cost-savings for insurance companies. For example, Kushwaha points out that the whole process required agents to help the customer upload their documents, then an internal team would vet these documents.
“The AA framework allows us to get instant access to their account statements in machine-learning format. Our algorithms read these documents and immediately give the underwriting decision,” he says.
The insurer has also started using the AA framework for the self-employed business customers, shifting from its focus on ITRs. Kushwaha says this has also helped them to meet insurance needs of the under-insured or under-served segment in the self-employed space. “Traditionally, the salaried individuals have dominated the insurance business of most insurers. But, now in our case the portfolio has already shifted to 60:40 (salaried and self-employed) in just one year. It’s difficult to get an ITR for self-employed customers earning ₹ 2 lakh–4 lakh annually; hence the AA-generated bank statements have significantly helped to bridge this gap,” he says.
Serving the under-served
“The AA framework is a consent-based data-sharing mechanism that offers consumers a convenient and secure solution to access and use their data across banking, investments, insurance, pension, and tax. This “informational collateral” will equip the unserved and underserved consumers to access appropriate financial products and services on better terms,” says BG Mahesh, co-founder of DigiSahamati Foundation.
Industry experts say over time, more loans would get disbursed on the basis of cash flows, especially for new-to-credit borrowers that are yet to build a credit track-record or a credit score.
“At some point, everyone has to start without a credit scrore. With the AA framework, the banks can start lending to such customers at least in a small way, in the form of a secured credit card, consumer durable loan, affordable housing, etc.,” says Shetty of Bank Bazaar.
For now, there are few gaps in the system as the AA infrastructure is still in the implementation phase. For example, not all banks have fully integrated with the AA ecosystem yet; the same goes for insurers and other regulated financial intermediaries. There are still gaps in data on the investment side, with some fintechs raising concerns due to lack of purchase price data on investments.
However, as things get ironed out, the AA framework can widen the reach and the depth of the penetration of financial products in India.