Recently, eight of India's major banks, including State Bank of India, ICICI Bank, Axis Bank, IDFC First Bank, Kotak Mahindra Bank, HDFC Bank, IndusInd Bank, and Federal Bank, joined the Account Aggregator (AA) network, which will allow customers to easily access and share their financial data while also giving them control over their personal financial information. Financial institutions such as banks, Non-Banking Financial Companies (NBFCs), third-party services, and others are featured in the AA network.
This framework will allow financial data to be exchanged between the holders of data and its users. For example, a bank may want to access a range of financial data on a potential borrower when processing a loan application. Through an account aggregator, the lending bank has access to the borrower's savings, past loan repayment history, mutual fund holdings, and insurance holdings. On the other hand, the borrower will have to provide permission for his data to be shared with the lending bank. The RBI has enabled many businesses, such as PhonePe, to function as account aggregators to make this procedure easier.
At the moment, an individual's financial data is scattered across several financial organizations' databases. So a person's savings and loan information may be held by a bank, his investment information by a mutual fund, and his insurance information by another financial institution. However, now this AA structure will help in providing all of this information under one roof.
Proponents of the framework believe that making data more accessible will improve the economy significantly. They believe the approach will help financial institutions make more accurate assessments of individual creditworthiness and, as a result, better loan decisions.
Even while credit scoring systems like CIBIL exist to measure individual borrower’s creditworthiness, their scope is limited. A person's PAN number, for instance, only records a small number of transactions with a value more than a particular minimal threshold. The AA framework would allow banks to potentially offer smaller loan amounts and reach out to a broader set of consumers for loans they might have previously rejected.
Going ahead, many Small and Medium Enterprises (SMEs) may be available without the need for physical branches, transforming credit penetration. Open banking works wonderfully for India as it is underserved regarding credit and other financial goods.
This edition of econSHOT is proofread by Keerthana Venkatachalam. The thumbnail art is designed by Alana Biju.
If you enjoyed reading this article, please feel free to share this in your network. Please don’t forget to follow us on LinkedIn, Instagram, Twitter, Facebook, YouTube and our website.