Open banking is helping revolutionize access to credit

Source: The post is based on the article “Open banking is helping revolutionize access to credit” published in Live Mint on 8^th May 2023.

Syllabus: GS 3 – Industrial Policy, Money & Banking

Relevance: measures adopted by the government to address the credit issues of MSMEs

News: The article discusses issues with MSMEs in accessing credit from banks and measures adopted by the government to address those.

What are concerns with MSMEs in getting access to credit?

Read Here: What is MSMEs & issue of MSMEs? and MSMEs: Significance, Challenges and Solutions

How has the government tried to solve the credit problems for MSMEs?

India has expanded the credit guarantee scheme for MSMEs.

Unified Payments Interface (UPI) along with smartphone-driven participation in the digital economy has revolutionized digital payments in India.

Moreover, the Reserve Bank of India’s (RBI) has recently announced to offer pre-sanctioned credit on UPI. This could help underserved segments to access credit.

Further, the government has also democratized access to data by taking efforts to boost the adoption of the Account Aggregator network to make financial transactions including lending faster and cheaper.

The government has also added the goods and services tax network (GSTN) as a financial information provider to the Account Aggregator network. It helps banks and other regulated lenders extend credit to small businesses.

These developments have helped all credit seekers and enhanced competitiveness among regulated lenders.

How the development to democratize the data is helping credit seekers and regulators?

Simpler customer consent mechanism: The process of obtaining customer consent to access both banking and GST data on the Account Aggregator network is now simpler and secure. Consent is required just once and lenders can also seek consent for data-sharing in the future.

Moreover, MSMEs no longer need to rely on multiple data aggregators to share their GSTN data with financial institutions through API services for a fee.

Boost for risk-based pricing and cash flow-based lending: Lenders now can get insight into the actual cash flows of a business through their bank statements along with regular GST data feeds on an MSME’s month-over-month sales, gross profits, regional revenue distribution, and sales turnover.

These insights can enable risk-based pricing and cash flow-based lending, benefiting both the lender and MSME.

Creating a level-playing field: The Account Aggregator framework will offer a level playing field for NBFCs because banks have had an edge over NBFCs in terms of access to key customer data because of current accounts.

Further, GST data may provide NBFCs and other lenders with insightful information that they can utilize to create more competitive and contextualised solutions for MSMEs.

Value-added services: Financial institutions, by actively monitoring GSTN data feeds and cash flow dashboards, would be able to provide value-added services like GST compliance, tax planning, and consultancy to help MSMEs optimize their GST-related spending.

The data can also be used for fraud detection and prevention, and help lenders cross-sell better to MSMEs.

What can be the way ahead?

Banks and NBFCs need to reorient and enhance their data capabilities by linking existing data sources such as bank statements and income tax returns with new sources such as GST and e-invoice data.

This will improve the efficiency and efficacy of their credit evaluation mechanisms.