How GSTN on Account Aggregators are Making Business Lending Smarter and Faster?

A world where getting a business loan is as easy as ordering a pizza online?! 

Too good to be true?

We live in the 21st century where everything working around us is digital. The internet is helping us rapidly reach places where even the roads don’t go. No doubt it has made our lives a little easier than it has ever been before, but this is also a critical moment in our country’s journey to financial inclusion with digitization. But as Uncle Ben said in Spiderman “With great power comes great responsibility!”

Imagine this scenario: You’re sitting in a shop, laptop open, trying to apply for a business loan. Emails, printouts, and endless paperwork can make even the most motivated entrepreneur lose their steam.

Well, the integration of the Goods and Services Tax Network (GSTN) with the Account Aggregator (AA) framework, promises to transform how we handle financial data, making the process more efficient, secure, and user-friendly. But what makes this system truly stand out? In this blog, we’ll dive into the essential role of GSTN within the AA framework, how it’s reshaping business lending and the incredible benefits it’s bringing to both lenders and businesses.

Challenges in Business Lending for Lenders and Borrowers

Before we dive in, let’s understand why business lending feels like pulling teeth. Both lenders and businesses face quite a few hurdles along the way. Firstly, before a lender can even think about handing out a loan, they first need to dive through a swamp of paperwork and manual verifications. Endless back-and-forth with businesses to gather financial documents – that’s a maze of inefficiency! They need to sift through multiple sources to validate a business’s financial health. 

In this maze, the risk of encountering fraudulent applications is a constant concern for lenders. Businesses might intentionally present inflated numbers or hide liabilities to secure loans they would otherwise not qualify for. This increases the risk of lending to untrustworthy applicants.  

On the other side, businesses have their own set of hurdles. They are supposed to provide documents manually, which not only consumes time but potentially causes delays in loan approvals. For MSMEs who contribute more than 30% to India’s GDP, 45% to its manufacturing output, and 48% to exports, the situation is even worse! Despite their immense importance, MSMEs in India have been grappling with a significant credit shortfall of Rs.33 trillion! These enterprises often operate with limited resources and low investment profiles. With limited access to comprehensive financial data, lenders struggle to accurately assess the creditworthiness of these small businesses, making it difficult to predict repayment capabilities and potential risks. This restricts their growth, resulting in low business closures and working capital.

Understanding GSTN and Account Aggregators 

GSTN

The Goods and Services Tax Network (GSTN) is a computerized online system that oversees India’s GST portal. It’s the central nervous system that keeps the entire GST ecosystem functioning smoothly! 

The unified digital platform maintains a repository of all GST-related information for taxpayers across the country. This includes registration, details, returns, and payment status. The system handles billions of invoices every month, facilitates seamless tax compliance, and ensures efficient administration across businesses. 

With more than 13.8 million users registered on the network, GSTN provides a clear view of a business’s financial health by showcasing its revenue, tax compliance, and payment histories. This data is invaluable for lenders, who can use it to evaluate the creditworthiness and stability of potential borrowers accurately. 

What is the Account Aggregation (AA) Framework?

The process of compiling financial data from various sources in a single location is called Account Aggregation. To make financial data freely accessible through data intermediaries, RBI launched the Account Aggregator (AA) Framework in India in 2021. It allows financial data to be shared securely and seamlessly across financial institutions, all with the user’s consent. A detailed picture of a consumer’s needs, income, savings, and financial behavior can be consolidated and analyzed from multiple financial sources. This holistic view empowers consumers and provides financial institutions with more accurate information. Isn’t it a win-win for both?!

How is GSTN included under Account Aggregators Facilitate Business Expansion?

With over 50 million MSMEs in India, only 16% of MSMEs receive adequate funding and support from banks, as most find it tedious to access credits from banks. As a result, loan applicants have no choice but to approach informal channels for credit due to the absence of proper financial documentation records and, therefore, pay high interest rates. 

The Account Aggregator (with an NBFC-AA license) architecture seeks to salvage MSMEs from the shortage of credit. By streamlining the flow of financial information, it empowers small businesses to secure loans more efficiently.

Financial Information Providers (FIPs) are institutions such as banks, insurance companies, and mutual funds that hold and manage financial data. FIPs provide the essential data that is required for financial assessments, loans, and investment decisions. Financial Information Users (FIUs) are entities, such as lenders, investors, or other financial institutions, that utilize the financial data provided by FIPs. FIUs analyze this data to make informed decisions regarding credit, investments, and other financial services. 

Who is the middleman who could transport all the data from one end and deliver it to the other, all within a finger snap? Account Aggregators! It collects, consolidates, and securely transmits financial information from FIPs to FIUs. This streamlined approach facilitates better access to financial services and supports more informed financial decisions.

How Does the Account Aggregator Network Function?

The AA framework facilitates quick credit access for MSMEs through secure and consent-driven data sharing between financial institutions and businesses. The AA model works in the following way: