Is this a world where getting a business loan is as easy as ordering a pizza online?!
Does this sound too good to be true?
We live in the 21st century where everything that works around us is digital. The Internet helps us reach places where even roads don’t go quickly. Without a doubt, the Internet has made our lives a little easier than ever before, but it is also an important moment in our country’s journey to financial inclusion through digitalization. But as Uncle Ben said in Spiderman, “With great power comes great responsibility!”
Imagine this situation: You’re sitting in your store, opening up your laptop and trying to apply for a business loan. Emails, printouts, and endless paperwork can be enough to discourage even the most motivated entrepreneur.
Well, the integration of the Goods and Services Tax Network (GSTN) and Account Aggregator (AA) framework promises to transform the way we handle financial data, making the process more efficient, secure and user-friendly. But what really makes this system stand out? In this blog, we take a closer look at the essential role GSTN plays within the AA framework, how GSTN is reshaping corporate lending and the incredible benefits it brings to both borrowers and businesses.
Challenges of Business Lending for Lenders and Borrowers
Before we get into the details, let’s understand why corporate lending is like pulling teeth. Both lenders and businesses face quite a few hurdles along the way. First, before a lender even thinks about making a loan, they must first wade through a swamp of paperwork and manual verification. The endless back and forth with businesses, collecting financial documents, is a maze of inefficiencies! You have to look at multiple sources to verify the financial health of a business.
The risk of facing fraudulent applications in this maze is a constant concern for lenders. Companies may intentionally present inflated numbers or otherwise hide their debts in order to secure loans that they are not qualified for. This increases the risk of lending to untrustworthy applicants.
On the other hand, businesses have their own set of hurdles. Businesses have to manually provide documentation, which is not only time-consuming but can also delay loan approvals. The situation is even worse for MSMEs, which contribute over 30% to India’s GDP, 45% to manufacturing output and 48% to exports! Despite their immense importance, MSMEs in India have suffered from a significant credit deficit of Rs 33 trillion! These businesses often operate with limited resources and a low investment profile. Limited access to comprehensive financial data makes it difficult for lenders to accurately assess the creditworthiness of these MSMEs, making it difficult to predict their ability to repay and potential risks. This limits their growth, leading to business closures and reduced working capital.
Understanding GSTN and Account Aggregators
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Goods and Services Tax Network (GSTN) is a computerized online system that oversees the GST portal in India. It is the central nervous system that ensures the entire GST ecosystem functions smoothly!
The integrated digital platform maintains a repository of all GST-related information for taxpayers across the country. This includes registration, details, filing and payment status. The system processes billions of invoices every month, facilitates seamless tax compliance and ensures efficient management across the enterprise.
With over 13.8 million registered users on its network, GSTN provides a clear picture of a company’s financial health by showing sales, tax compliance, and payment history. This data is invaluable to lenders, who can use it to accurately assess the creditworthiness and stability of potential borrowers.
What is the Account Aggregation (AA) Framework?
The process of collecting financial data from various sources into a single location is called account aggregation. To enable free access to financial data through data brokers, RBI launched the Account Aggregator (AA) framework in India in 2021. This will allow financial data to be shared securely and seamlessly across financial institutions with the consent of the user. A detailed picture of the consumer’s needs, income, savings and financial behavior can be analyzed by integrating multiple financial sources. This holistic view empowers the consumer and provides more accurate information to the financial institutions. Isn’t it a win-win for both?!
How does GSTN fit into ‘Account Integrator Facilitating Business Expansion’?
There are over 50 million MSMEs in India, but only 16% of them get adequate funding and support from banks, as most MSMEs find it tedious to get loans from banks. As a result, loan applicants are forced to get loans through informal channels due to lack of proper financial documentation, and thus end up paying high interest rates.
The Account Aggregator (NBFC-AA License) architecture seeks to save MSMEs from credit crunch. It helps MSMEs secure loans more efficiently by streamlining the flow of financial information.
Financial Information Providers (FIPs) are entities that hold and manage financial data, such as banks, insurance companies, and mutual funds. FIPs provide essential data needed for financial evaluation, lending, and investment decisions. Financial Information Users (FIUs) are entities that utilize financial data provided by FIPs, such as lenders, investors, or other financial institutions. FIUs analyze this data to make informed decisions about credit, investment, and other financial services.
Who is the intermediary that can transfer all the data from one side to the other with a snap of a finger? The account aggregator! Collects, integrates and securely transfers financial information from the FIP to the FIU. This streamlined approach facilitates better access to financial services and supports more informed financial decisions.
How does the Account Aggregation Network work?
The AA framework facilitates rapid credit access for MSMEs through secure and consent-based data sharing between financial institutions and corporates. The AA model works as follows: