Even as India’s asset monetization initiative—the National Monetization Pipeline—garnered due attention, two recent initiatives that are far more real haven’t received their fair share. A factoring bill amendment was passed on 29 July. Introducing the bill in the Lok Sabha, the finance minister promised that thousands of non-banking financial companies (NBFCs) would now be able to buy receivables from micro, small and medium enterprises (MSMEs). She was not exaggerating. Earlier, the law stipulated that for an NBFC to engage in factoring business, its: (i) financial assets in factoring business and (ii) income from factoring business should both exceed 50% (gross assets/ of net income), or more than a limit notified by the Reserve Bank of India (RBI). The Bill removed this limit for NBFCs to engage in this business (bit.ly/3h4EPuZ).
Then, on September 3, the country announced the launch of its account aggregator platform. Eight banks said they would roll it out. Account Aggregators (AAs) are ‘data access fiduciaries’ that act as the front end of its Data Empowerment and Protection Architecture (DEPA). OK, let me explain it in English. We all leave various traces of data when we use smartphones and public WiFi. We don’t think about it. But, the financial figures are different. It needs to be secure and should only be accessed with the consent of the user (data owner) and the purposes for which the user gave consent. DEPA gives this assurance to every Indian. It empowers you and me, those who generate data while doing any transaction using digital mediums. AA are the trustees of our data. They can’t get a peek into its details. Nor can they use this data. However, with our consent, they may pass data from financial information providers (FIPs) to financial information users (FIUs).
If you are an individual or run a small business and are applying for a collateral-free loan, the lender may ask you to submit a plethora of documents to establish your creditworthiness. You have to download these from various sources (bank statements, insurance policies, mutual fund holdings, etc.) or give the lender access to the same. Now, upon your approval, the AA will do so. The data in their hand will be encrypted and can only be decrypted by the FIU. These are usually financial institutions.
What does account aggregation do? It fills an information gap efficiently, safely and easily. It is critical. Most of the time, risk-based lending doesn’t happen because the information is either unavailable or not easily recoverable, and therefore lenders stick to collateral-based lending. Over time, this will change as all parties become comfortable with the AA platform. Every formal financial transaction that we make online can be useful information in meeting our future funding needs. In this sense, AAs can become agents of financial inclusion (pwc.to/38H52eE).
It is being built since 2016. This is another important milestone in the amazing digital transformation that the country is going through, most of which has started with the PM Jan Dhan Yojana (PMJDY) and Aadhaar. In August, the National Association of Software and Service Companies (NASSCOM) brought out a report on India’s digital public goods. They are public goods, that is very important. In the West, and especially in America, they are in private hands. They have become a de facto monopoly. They own, control, direct and manipulate the information that travels through the ‘highway’ over which they have a monopoly. In India, by contrast, “the emerging government as a enabler of citizen-centric services is one of the key factors driving the rise of public digital platforms in India.” NASSCOM said that our digital platforms were developed at low cost, interoperable and widely adopted. In another report, PwC India mentioned that since its launch in April 2016, Unified Payments Interface has taken the Indian payments ecosystem by storm (pwc.to/38H52eE). In its August bulletin, the RBI noted that its digital payments index grew 2.7 times in just three years after March 2018 (bit.ly/3zKDl0d).
It is also a matter of happiness that Goods and Services Tax Network has been given in-principle approval to become FIP on AA network. The GST network is such a huge repository of information that its being a part of any data network is a big plus for MSMEs to access finance. Quietly, in the last seven years a lot of work has been done to empower and enable MSMEs.
Now, GSTN and TReDS (Trade Receivables Discounting System) should join hands and make it automated that if a buyer accepts an invoice for claiming input tax credit, the invoice will also be accepted for TReDS purposes. Also, if the GST reverse charge mechanism is implemented on MSME suppliers (who are too small to pay GST), it can give a big boost to the MSME sector.
After that, the only thing that will remain pending is an amendment to the MSME Act of India to allow MSMEs to retain their classification as long as both the sales turnover and investment criteria are met, instead of just one of them. Don’t be It will serve as a permanent foundation on which a sustainable edifice of economic development can be built.
V. Ananth Nageswaran is a member of the Economic Advisory Council to the Prime Minister. These are the personal views of the author.
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