Credit Democracy

IN THE IMMEDIATE aftermath of demonetisation which abolished high-value currencies on November 8, 2016, Naresh Kumar, the owner of a kirana in a middleclass neighbourhood in Kalkaji, New Delhi, faced a challenge: Kumar was not able to receive payments from cash-strapped customers; nor was he able to pay vendors. It was threatening the very survival of his enterprise that had been in business for over three decades.

That was when he opted for a Paytm wallet. It provided limited relief, as he soon discovered that everyone he transacted with needed to be part of the Paytm ecosystem. This was impossible as there were rival digital wallets already operational. The lack of interoperability among the wallets was cramping Kumar’s business, further shrinking his limited working capital.

The irony was that an option did exist in the Unified Payments Interface (UPI) network. Launched by the National Payments Corporation of India (NPCI), a non-profit, in April of the same year, it provided public digital rails which, if adopted by all the wallets and banks, could connect the entire financial sector and ensure seamless digital transactions. This interoperability function is very similar to driving on an open highway as opposed to one with controlled access.

However, the UPI pilot launched eight months earlier on April 16, 2016 by then Reserve Bank of India (RBI) Governor Raghuram Rajan had failed to enthuse the financial sector. The squeeze on cash imposed by demonetisation turned out to be a blessing in disguise. The desperation for an alternative provided an excellent use case for UPI.

And NPCI did not miss a trick. On December 30, 2016, it launched Bharat Interface for Money (BHIM) as proof of concept. Once the app was downloaded on an individual’s mobile phone, it enabled secure payments digitally, bypassing the need for cash.

Within 10 days, the app was downloaded by one crore users. It was the turning point in the story of India’s digital economy. In 2016-17, digital transactions using UPI were a mere 17.86 million. This soared to under one billion the very next year and then rose exponentially thereafter. In 2021-22, transactions were at a staggering 45.97 billion. At the end of August this year it was 30.27 billion, suggesting that there will be a new record for UPI transactions by the end of the current fiscal.

Looking back, it is clear that UPI did much more than solve the problem of interoperability in digital transactions. The template it created—which provided public digital rails on which anyone, whether government or the private sector, could build innovations—fostered a unique digital economy in India. Not only is this enabling India to leapfrog but it is also rapidly making it the global lighthouse for digital economies.

These inclusive digital commons created by India are now poised to solve another problem faced by Kumar, one of access to affordable working capital. Especially since these small enterprises operate on the principle of paying for inputs in cash while selling to customers on credit—leaving them desperate for working capital. Once again, the framework is enabling this reset wherein the traditional method of lending against assets is being replaced by one based on cash flows digitally captured by tracking an individual or company’s financial data matrix.

The credit needs of this underserved segment, made up mostly of small and medium enterprises (SMEs), which have few or zero assets to put up as collateral against loans, is estimated at over $300 billion. Denied formal credit, these economic entities are forced to lean on informal sources of credit, often paying a usurious rate of 6 per cent a day.

SERVING THE UNDERSERVED

LIKE UPI, THE GOVERNMENT, IN TANDEM with RBI, facilitated the creation of another digital public good (DPG). This time it was the Account Aggregator (AA), which allows the secure exchange of personal information between a provider and a user. AA enables consent-based monetisation of data, particularly of individuals and small enterprises who otherwise remain invisible to most financial intermediaries.

Overnight, this turned personal information, especially relating to spending, earning and saving habits, into collateral, on a par with assets—the traditional means of lending. In the digital economy, every time an individual transacts, they leave an audit trail; the more the transactions the denser the trail, and hence the easier for artificial intelligence (AI)-driven systems to glean an individual’s creditworthiness.

Kumar, for example, would have built an enviable digital footprint in the last six years that he has operated his wallet. It would be a record of all the payments he has received from customers. Normally, this would be of no use to Kumar.

Using the AA framework though, this digital footprint has been monetised into an information collateral. Any lender could leverage this data to offer customised cash flow-based loan products that are based on income and financial habits, not assets.

AA, therefore, is like a financial intermediary. There is a big difference though—AA oversees the exchange of an individual’s data instead of facilitating money transfers. The institutional presence protects the privacy of an individual’s data and mitigates against misuse by companies.

Nandan Nilekani, the man who launched Aadhaar, the unique 12-digit identity project, summed it up best at the launch of the AA framework last September.

Addressing a gathering hosted by Sahamati, the alliance of Account Aggregators, he said, “Working capital is often not available to small businesses because of an information asymmetry and because the lender is not able to come and make a physical assessment of their assets. However, if a firm has a digital footprint of its own business, has the [record of] payments made to its vendors, of the purchases made by consumers from them and the invoices and the taxes that are paid, then that information can be used to give that MSME a working capital loan. And, therefore, digital footprints of a small business or an individual can be used to access credit. This can lead to the democratisation of credit.”

Nilekani is right. The credit needs of this underserved segment of about 650 million are estimated at over $300 billion. The information asymmetry is being resolved by the AA framework. What it basically does is facilitate the secure exchange of a firm’s consent-based data between a user and a provider.

Typically, this data—capturing cash flows in an individual’s bank account, for instance—can be mined to offer non-collateral-based loans. Another potential use case could be how the over 100 million beneficiaries of the nearly ₹1 trillion rural employment guarantee scheme can use their data capturing receipts from the government to avail loans. At present, this is not possible since borrowing is presaged on collaterals, which this cohort rarely possesses, and their cash flow data is not shared.

And this holds true for not just farmers and small shop owners but also for traders, solopreneurs, self-help groups and gig economy workers, all of whom generate a rich digital transaction history.

In July, the AA framework logged an important milestone: the linked accounts and information requests crossed 1 million. More importantly, in August this accelerated to 1.5 million, suggesting that the AA framework may be at a tipping point.

The process got a big leg-up after all public sector banks (PSBs) enrolled. As a result, about 1.1 billion accounts are AA-enabled now. The use cases, while accelerating, haven’t even scratched the surface of the credit potential.

It is poised to get fresh legs with the Securities and Exchange Board of India (SEBI) embracing the AA framework. It means investor data on investments in shares and mutual funds, provided consent is granted, can be shared with information users. It will bridge the information gap between investors and wealth managers.

At the same time, the wealth manager will be able to draw up a better risk profile of the investor and thereby customise products—as opposed to the present practice of one-size-fits-all. And this, at a time when the interest of small investors in capital markets is growing exponentially. Demat accounts, a proxy measure for investor interest, doubled to 100 million a few weeks ago. The use of the AA framework will lower the cost of information access to wealth managers and thereby accelerate the onboarding of the next generation of small investors.

DIGITAL COMMONS

THE FOUNDATION OF THE AA FRAMEWORK enabling the audacious idea of taking credit to the borrower is premised on the unique India technology stack which has an open digital architecture.

The India Stack has three layers: Identity (Aadhaar), Interoperable Payments (UPI) and Data (which enables secure exchange of personal information).

The idea of Aadhaar, which monetised identity, was conceived by the National Democratic Alliance (NDA) led by Atal Bihari Vajpayee, officially birthed by the United Progressive Alliance (UPA) led by Manmohan Singh who inducted Nilekani, the co-founder of Infosys, to helm the project, and accelerated by NDA led by Narendra Modi. Implicitly, therefore, the entire project has inbuilt bipartisan political consensus.

Aadhaar was also India’s first DPG. Since then, India has added several others: UPI, CoWin (which enabled two billion Covid jabs seamlessly), DigiLocker, FASTag, and more recently the AA framework, as well as the Open Network for Digital Commerce (ONDC).

In terms of scale of use, Aadhaar, UPI and CoWin are now the largest platforms in the world.

Built on open protocols, DPGs or digital commons are by design interoperable and free for anyone to use and develop innovations. This open digital ecosystem (ODE) contrasts with the closed platforms like Facebook and Google that dominate the digital world.

SMALL IS BIG

DPGS ARE LIKE BUILDING BLOCKS THAT CAN BE USED on their own or combined with each other to provide innovative solutions to enable economic and social empowerment.

For instance, the AA framework is poised to provide fresh wings to another DPG, the Open Credit Enablement Network (OCEN) dedicated to SMEs. As UPI did for payments, OCEN too unbundles lending, allowing innovations. While Sahamati helms the AA framework, OCEN is guided by CredAll, another non-profit.

The specific use case for OCEN is enabling access to working capital and sachet loans for SMEs. In the existing lending framework, this cohort will be ignored.

It is estimated that of the 650 million people, almost double the size of the population of the US, eligible for credit, only about 10-15 per cent get serviced by banks. AA will enable initiatives like OCEN to address the underserved credit needs of this cohort. India’s progress in financial inclusion by turning the business of credit on its head is compelling: a decade ago, 430 million people did not own a bank account and, today, they will be queuing for credit.

Since the entire backend is digitised and automated, OCEN can eliminate expensive KYCs (Know Your Customer) and reduce fraud. Hrushikesh Mehta, Co-founder and Chief Evangelist at CredAll, points out (see interview) that this will not only enable lower onboarding of borrowers but also make it worthwhile for intermediaries to extend small sachet loans.

“Look what happened when credit bureau data came into our country in 2005. The personal loans market exploded. And along with that the consumer durables market and all the consumption that goes with it. We are trying to drive a similar thing for MSME credit where we can make it affordable for the lenders to lend and make it affordable for the borrowers. And this, we hope, will drive economic activity,” Mehta said.

Management guru CK Prahalad had pioneered the idea of sachet consumer products to popularise their use in India. And this in turn powered the bottomline of consumer goods companies which witnessed a massive surge in sales. These limited-use sachet products revolutionised consumer experience and spending in India.

Something similar is poised to happen in the business of credit with the bottom of the pyramid joining the party. OCEN, which was soft launched two years ago, as BHIM did for UPI, has developed proof of concept by extending sachet loans to small enterprises operating in the `30,000 crore government e-market site or GeM. The smallest loan size was `160—an economic marvel that a financial intermediary could afford to lend at this level and at the prevailing bank rate.

An important subtext of this credit enablement project is that it will accelerate the formalisation of the Indian economy. The benefits of the formal economy, including cheaper credit, incentivises SMEs to be part of the mainstream; at present, facing steep borrowing costs, they prefer economic anonymity, which helps them evade taxes.

If indeed this pans out, then it will be a win-win for the Indian economy. Not only will it grow national income but it will also boost tax collections for the national exchequer. Most importantly, it will have disincentivised tax evasion.

Clearly, India is at a point of inflection. It is poised to expand the footprint of credit democracy. The consequent empowerment will only accelerate the ongoing socio-economic transformation. The change that will ensue will be both unprecedented and profound.

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‘The idea is to get credit to everybody,’ says Hrushikesh Mehta, co-founder of CredAll

account aggregatorsdigital cash flowsdigital creditdigital economyIndian economySmall businessesUPI