With various Fintech businesses offering effortless credit, identifying the creditworthiness of a loan applicant is becoming more difficult until all the details are accessible from each source and from which the individual has applied for loans.
Although digital lending has removed the requirement for physical papers, people are more probable to discard a loan application if they are asked for bank statements, even if it is performed digitally. As per statistics, approximately 70% of loan applications are disposed of in the middle as they are too time-wasting. Moreover, scrutinized bank statements are more feasible to be manipulated because data changes are difficult to notice, even with a screen scraping tool. It will still need a human representative to check specific facts and eliminate fraud cases, which would reduce the procedure.
To identify the problem, the RBI or Reserve Bank of India has authorized the setting of an Account Aggregator framework. It will gather information from all lending providers in order to assess the legality of loan applicants, decreasing the number of lending frauds. Prior to we go into the advantages of the system, it is significant to know about Account Aggregation, what is the AA framework, and how it works.
Illustrating Account Aggregator Framework and its Working
The three key constituents of the system are the Financial Information User (FIU), the Account Aggregator (AA), and the Financial Information Provider (FIP). An Account Aggregator is a new kind of Non-banking Financial Corporation that the RBI has accredited to handle client permission for financial data allocation. The Account Aggregator is developed as an outcome of an inter-administrative agreement created by the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority (IRDAI), the Securities and Exchange Board of India (SEBI), and the Pension Fund Regulatory and Development Authority (PFRDA) as a means of the Financial Stability and Development Council (FSDC).
Financial Information Providers (FIPs) can digitally deliver approved data to Financial Information Users (FIUs), involving banks, lending companies, and NBFCs. Institutions that supervise user data are called FIPs or financial information providers. These are mostly banks, pension funds, mutual funds, and some NBFCs that furnish personal or business data sources, which FIUs can get via Account Aggregator recommendations.
Advantages of the AA network
Now that you got to know about account aggregation let’s get deep into advantages of AA network:
1. The AA framework is helpful in accumulating and fortifying all distinct financial data, making credit access simpler for both people and businesses. The most important feature of this framework is the approval of the parties involved. The AA network is considered to alleviate the Indian economy’s present credit blockage created by a shortage of classified data exchange mediums. Standard lending can be channelized by the network, letting to increased utilization and acquisition.
2. Likewise, AA may help financial organizations successfully check a borrower’s creditworthiness, make more profitable lending decisions, and sidestep bad loans and non-operating assets. This method is also predetermined to grow the number of borrowers for these financial institutions.
3. Users gain from the framework as it will rationalize the earlier time-wasting loan application procedure. Since financial institutions get access to their individual financial information, people can foresee better-modified financial goods.
4. The people who have long been overlooked conventional lending – New-to-credit and MSME borrowers – will profit much from the framework. Conventional lenders generally look for fixed collateral together with credit history when approving loans – MSMEs usually do not have immobile collateral, and inherently, new-to-credit customers have no past record to show.
5. With the AA framework like Anumati, the borrower’s creditworthiness can be checked via alternative data sources, for example, bank statements, GST invoices, bill payments, and different cash flow replacements. It takes out the need for physical subsidiaries and facilitates access to credit for an initial loan seeker pool.
6. The change in the FinTech world is completely reliant on data irregularity. Solving this irregularity is the primary step to introducing very inventive products and services. For example, with the takeoff of the GST administration, the data irregularity disappeared about applicable charges and taxes in various states, and quickly, the revenues began to grow as more people became convenient with inter-state business.
7. Additionally, by solving data asymmetry at a very profound level, the AA framework is hooked to make new use cases crossways many industries. Whether it is a trading application that can do faster KYC or a loan application that can pre-verify and authorize a definite pool of loan seekers and offer them loans industriously.
8. Moreover, by incorporating safe end-to-end data allocation and digital signatures, AA will assist in removing fraud normally linked to physical data distribution. Borrowers or loan applicants are fully apprehensive of what they are accomplishing to all through the procedure and can take back their support at any time, assuring data abuse is bypassed on both sides.
9. Similarly, the past alternative to AA was a bank statement study, which is both costly and prone to error when done manually. Additionally, the most general type of scam involves people simply forging false bank statements to get a loan. Those problems will die out with AA as the data would come straight from the bank or financial institution.
10. What’s more, as account aggregators mix data from diverse sources, they ensure a wider extent of criteria is regarded when underwriting, decreasing the possibility of fraud. At the onset of the risk review process, inadequate borrowers are phased out, and transaction charges are lessened. As a consequence, loan providers can be more progressive with loan amounts provided to authentic borrowers.
The online lending industry is positive for a change that assures pace and scale, with millions of loan applications every month. Most essentially, account aggregators would bring in much of the technological modification and policy amendment that will help loan providers draw, assess, and authorize more prime customers.
Embracing the Account Aggregator framework simplifies the procedure and reduces the charges of asset management and lending for customers. Therefore, reducing the risk of lending fraud to a certain extent.