Pragati - The Sahamati Newsletter June 2024

Latest events and updates about Account Aggregator ecosystem

What’s New

On the lending side, the report highlights the rapid growth in the unsecured retail loan segment. This segment has experienced a 23% growth in the last two years compared to a 12-14% overall credit growth. The report also noted a significant chunk of frauds associated with loan portfolios compared to a much smaller number in cards and other internet frauds. In the consumer credit segment, delinquency levels among borrowers with personal loans under ₹50,000 remain elevated. NBFC-Fintech lenders, who hold the largest share in both sanctioned and outstanding amounts, exhibit the second highest delinquency levels, surpassed only by small finance banks. This increase in the amount of unsecured retail loan segment can pose a threat to the stability of the Indian financial sector, if left unchecked.

In a recent interaction, M Rajeshwar Rao, Deputy Governor, RBI mentioned the impairment framework prescribed under Indian Accounting Standards and said that while the framework was forward-looking, it had been observed that some non-banking financial companies primarily relied on the 30 days-past-dues (DPD) criterion for loan loss. Mr. Rao further stated that DPD, being a lagging indicator, is not always in sync with using the forward-looking approach of Expected Credit Loss (ECL). The statement reiterates the need for lenders to strengthen their capability in tracking lead indicators, which can warn banks and NBFCs of early stress signals in their portfolio, rather than just relying on lag indicators such as 30 DPD or bureau scores. 

The AA framework, as a game changing framework, empowers banks and NBFCs to contain fraud at the time of loan processing by ensuring tamper-proof bank statements are available to lenders.  A survey with leading banks highlighted that forged bank statements are estimated to account for 0.5-4% of the underwriting applications.  The number has been reported to be as high as 10% for digital NBFCs. Authentic banking data also enables lenders to cross-validate the profile information and other signals received from bank statements with other documents such as Aadhaar, PAN Card and Bureau Reports.

Further, the recurring consent feature enables lenders to build robust early warning signals that can help them take corrective actions on potential cases of default and address the concerns raised by lenders. The AA Framework has also started enabling lenders to build effective collection strategies based on a dynamic view of the defaulting borrower’s finances. 

A healthy lending environment is desirable not only for the banking industry but also for consumers. A bad credit cycle leads to credit tightening, which impacts the ability of genuine and deserving borrowers to access credit at affordable rates.  Given the overarching need to build a healthy credit environment and the initial positive impact of the AA Framework, the regulators and policymakers are supporting its growth. However, there is a need for more concerted efforts to strengthen the framework’s delivery for building a conducive credit underwriting and monitoring environment in the country.

As the AA ecosystem delivers on its potential of furthering credit, Sahamati has taken several initiatives to ensure that the scale-up happens with responsible customer practices. Sahamati  has been working towards parameterizing consent templates that define the upper bounds for data usage. At the same time, Sahamati is developing technology infrastructure to support programmatic detection and adherence to the consent templates implemented in the ecosystem, thereby reducing the chances of data misuse. With these robust measures in place, the AA ecosystem is well-placed to fortify the financial sector from fraud & misuse, fostering a safer and more trustworthy financial environment for both institutions and consumers.

Similarly, the AA ecosystem has strived to formulate ecosystem codes of conduct and best practices through various participatory governance forums comprising diverse participants across sectors, license types, and scales of operations. Recently, RBI released the Omnibus Framework for SRO and is anticipated to come out with sector-specific applications, including a dedicated SRO for the AA Framework, which is expected to strengthen the layer of participatory governance in the AA Ecosystem.

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