MSME lending: Panel asks regulators to encourage adoption of Account Aggregator standards

The proposed digital ecosystem would help the concessional financing and credit guarantee to be better targeted to those sectors that are experiencing difficult economic conditions due to external factors beyond their control.

The MSME sector plays an important role in growth of the Indian economy with a vast network of about 6.34 crore enterprises. Pic: Official Website/ Reuters

A parliamentary panel on Tuesday asked the financial sector regulators to encourage and accelerate the adoption of Account Aggregator standards across all regulated entities with a view to expediting lending to the MSME sector.

The Standing Committee on Finance headed by BJP leader Jayant Sinha said MSME financing could be vastly expanded and better targeted through an integrated digital ecosystem.

Once it is in place, it is possible to provide an affordable line of credit (particularly with the MSME Vyapar credit card) for working capital, ensure trade financing for their revenues, provide capital loans at affordable rates, and necessary credit guarantees.

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The proposed digital ecosystem would help the concessional financing and credit guarantee to be better targeted to those sectors that are experiencing difficult economic conditions due to external factors beyond their control.

The panel has suggested the Department of Revenue and the Reserve Bank of India close out their 2020 discussions with the required technology and regulatory updates to bring Goods and Services Tax Identification Number (GSTIN) formally into the Account Aggregator framework to allow regulated entities to access GST data with individual consent.

The Committee believe that regulated entities in the financial sector including Banks and NBFCs need to be able to access GST data securely via regulated Account Aggregators to sanction loans based on future revenue.

Account Aggregators (AA) are entities that enable financial data sharing from financial information providers (FIPs) to financial information users (FIUs), based on the consent of the customers.

"The Committee recommend that the members of the Financial Stability and Development Council (RBI, SEBI, IRDAI, PFRDA, and the Ministry) encourage and accelerate adoption of Account Aggregator standards across all regulated entities, and indirectly monitor progress of adoption as part of financial inclusion efforts," the report tabled in Parliament said.

According to government data, out of 6.34 crore MSMEs, less than 40 per cent borrow from the formal financial system indicating that a large number of these enterprises remain outside the ambit of formal finance to meet their credit needs.

Department of Financial Services focus on encouraging public sector banks, public sector insurers, public sector pension funds, and public sector depositories to adopt the Account Aggregator standards, it suggested.

The Committee believe that scaling up to universal adoption of Account Aggregator beyond the small set of large financial institutions that have already adopted will create powerful network effects for financial inclusion, access to credit, and economic growth and ensure the benefits reach individuals not banking with the largest institutions, it said.

This will allow more individuals and MSMEs to share their financial information with lenders and improve their access to flow-based credit based on their data.

It also said that formalisation of the MSME sector needs to be accelerated to promote their growth.

Small changes to Udyam and GST certificates will allow them to be universally relied on by financial institutions as KYC documents and reduce the cost of MSME due diligence, it said.

Unfortunately, it said, "businesses do not have access to a fully digital KYC process today; many of their identification documents (e.G., Company articles of incorporation, partnership deeds, etc.) are still physically provided and verified."

Updating and digitising KYC processes is key to increasing volumes of safe, small ticket lending at low unit costs for lenders, it said.

Micro, Small and Medium Enterprise (MSME) sector contributes significantly to employment generation, innovation, exports, and inclusive growth of the economy.

The MSME sector plays an important role in growth of the Indian economy with a vast network of about 6.34 crore enterprises.

The sector contributes to around 30 per cent of GDP, over 48 per cent of exports, and about 45 per cent to manufacturing output, while creating employment for about 11.1 crore people, which in terms of volume stands next to the agriculture sector

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