The Pattern #37: AA and GSTN - the next generation of cash flow lending?

Mayank Jain   /    Head - Marketing and Content    /    2022-11-25


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    Hello everyone, 


    Welcome to the 37th edition of The Pattern, a weekly roundup of all the rumblings from the world of finance and technology. Let’s get started. 


    Trust and credit have long been a chicken-and-egg issue for lenders, policymakers, and borrowers alike. Banks and NBFCs can’t trust new borrowers without a strong credit history to back them up, and borrowers can’t avail of loans to build that credit history. 


    For more than 160 million new-to-credit and underserved customers in the country, this is the most severe cause of a credit gap and pushes people towards informal means, including predatory moneylenders. 


    However, the fix might be around the corner. Or at least that’s what the common wisdom of the day tells us. 


    First, the UPI revolution digitized many transactions, including peer-to-peer transfers and merchant payments. First, it gives lenders deeper visibility onto a user's daily financial life. And second, it helps them see if the merchant is eligible for a credit facility given their daily or monthly revenues. 

    However, this nifty idea - of lending not based on assets but on cash flows - suffered a profound impediment. That of access to the data!


    Just how is a retail borrower supposed to furnish in-depth bank account statements over some time, and just how is a lender meant to pore over these manually or with optical readers and make sense of it - for a small ticket-size loan that barely makes ends meet? 


    Enter Account Aggregator - a brand new framework that enables open data sharing in a secure, consented, and privacy-first manner between entities. AA has been a game-changer. It’s opened up silos of customer data buried inside financial institutions and brought it to the fore - with FinTechs and new-age lenders lining up to innovate on top of it and boost their underwriting. 


    “As of date, 210 companies are registered, including 49 banks, 94 non-bank lenders and microfinance players, 20 insurance firms and distributors, and 11 stock brokerages. Of these, 78 firms are live while the rest are in various stages of implementation. Also, 23 companies are registered as data standard technology service providers, or TSPs (which work with financial companies to integrate with the aggregator system), 43 data analytics TSPs (which help firms with verification, monitoring and analytics tools) and 19 user experience TSPs (which help build a customer journey map for clients). These, along with six apps (plus another nine that are yet to launch), make up the account aggregator ecosystem.”



    The GST era 


    The biggest leap in the AA framework came this week as the GSTN network joined the AA ecosystem. This means that GST data and returns will now be seamlessly fetched by the financial services providers - providing a massive boost to digital underwriting for businesses. 


    The biggest beneficiaries of this move will be MSMEs that have been credit starved for so long due to the chicken-and-egg trust problem. 


    The benefits of GSTN inclusion will be three fold. 


    First, it’ll allow for faster processing of underwriting of business credit across use cases such as working capital loans, advances and even BNPL on B2B platforms as the GSTN data provides a precise picture of a businesses’ cash flows and revenue. 


    Second, it’ll improve the underwriting prowess for all digital lenders currently doing business lending digitally. The GSTN data will add depth and dimensions to the current set of parameters and scoring that is likely to improve approval rates and distribution in the long run. 


    Third, the GSTN data clubbed with AA’s consent system will ensure that lenders can seamlessly pull data multiple times over the loan’s lifecycle and this can help them monitor accounts in real-time and build early warning systems which can keep the portfolio healthy and improve collection efficiency in case of delinquencies. 


    While the announcement precedes a lot of time that will go into developing these solutions and technology once the network goes live, it’s indeed an exciting time to be in the FinTech space and see the most thorny problems get solved with the use of technology. 


    Credit bouquets


    On that note, there’s greenshoots emerging in terms of credit growth and the overall signals it brings in terms of the health of the economy. We did a deep dive on the same in the last edition that you can read here


    But, the interesting thing to note here is that business credit or corporate loans have grown by merely 3% CAGR between 2019 and 2022. However, CRISIL now expects the corporate loan book to grow by almost 12-15% in the coming year. 


    At the same time, SBI managing director Swaminathan Jankiraman also expects credit to companies to increase by 12% year-on-year. 


    Meanwhile, the asset base of NBFCs reached Rs 54 lakh crore as on March, 2022 - this is almost 25% of the entire commercial banking sector’s balance sheet. 


    The non-banking lenders received bouquets of praise from Minister of State for Finance Bhagwat Krishanrao Karad who said that the sector is becoming the engine of growth in the Indian economy and helping SMEs access credit. 


    Interesting times, indeed. 


    That’s all from me this week. I will see you next week. As always, leaving some reading recommendations below. 


    Reading list 


    1. The A-team: How alternate data & Account Aggregator can shake up credit underwriting

    2. Banks and the liquidity dilemma

    3. Can credit push digitisation in the MSME sector?

    4. It will give another level of comfort to MSME lenders: Experts on GST data access via account aggregators

    5. For big tech and banking, cautious optimism is a better approach

    Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to never miss any of our updates. 




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