NBFC

The Future of NBFC Account Aggregators in India

In recent years, RBI disclosed and displayed publically that the NBFC-AA (Account Aggregator) network is a financial data-sharing system that has revolutionized investing and credit, giving millions of consumers with greater potential in terms of keeping financial records and expanding potential among customers for lenders including the fintech companies. However, the RBI itself determines the concept of an account aggregator, and thus, a framework for its registration and business operation was further notified. The financial data sharing system (Account aggregator) launched in the month of September 2021. The RBI compliance on NBFC-AA starts initially from ensuring data security to having a board-approved policy, among others. An account aggregator allows a person to access data securely and share such information digitally in the network from the end of one financial institution where customer have their account to the other financial institution existing in the network of an account aggregator. Such account aggregators are prohibited from sharing such data without obtaining the consent of the customer. 

Purpose of NBFC Account Aggregators

Account Aggregator or NBFC-AA refers to those non-banking financial companies who are operating in the business of an account aggregator for a fee or defined within the  RBI Master direction  DNBR.PD.009/03.10.119/2016-17’’ dated 2^nd September 2016 under section 3 (1)(iv). In terms of registration and operation of AA, such direction needs to be complied with by all non-banking financial companies operating the business of Account Aggregator. Moreover, an NBFC-AA (account aggregator) uses advanced technological equipment to assist you in the simplest defined way with the intent to exchange your financial data securely with banks, insurance companies, and many more with your consent. NBFC-AA enables you to use your financial information to avail a variety of financial services as per your personal and business needs. An account aggregator empowers individuals to gain control over their financial data. This is the first step towards making an open banking system where millions of customers are empowered to access their financial data digitally and can share such data with financial institutions most effectively and securely. Data in this mechanism can’t be shared without obtaining consent from customers. It seems that previously, the Indian finance system involved many hassles for customers in sharing their details with third parties. It took unnecessary delay from the individual’s end to share physical scanned and signed bank statements copies after getting notarized stamp documents or required to share their account along with passcode details for financial history to a third party. But now, it has been replaced by an account aggregator network with a simple technology based on secured digital data access and its sharing process. It will more likely generate a wider scope for new kinds of services, such as new types of loans, etc. This will reduce the bulky manual process of taking loans for customers as their data is stored at different places, thus possibly being a tough task to bring all such data together. An account aggregator company can easily collect all financial data in the same place quickly and more cheaply. Further, AA can initiate a fast-track loan evaluation process for customers to get loans accordingly.

The Evolution of Financial Services in India

Our bond with money evolves as we get more advanced in life. It usually seems that the first generation focuses on its survival while the second generation focuses on basic needs such as food, clothing, and shelter. Once such needs are met, the third generation focuses on making needs into wants. Such transition from need to wants is the transition of old India into new India. Traditionally, we prefer investing in assets like real estate and gold, but now we are focusing on investing in financial assets, which are growing much faster than physical assets. Recently, as per reports, India crossed the UK economy and acquired 5^th place among world economies with a per capita income of $2000. And it will grow at a rate of 6% till 2025. After the emergence of Covid-19, people started to invest more in the stock market and insurance. The financial assets have increased with more investors participating in the capital market and tend towards the saving concept. However, the regulatory bodies of the capital market have effectively made a transparent ecosystem for investors with huge developments in the stock market arena. Statics submits that financial assets increased from 56% to 65 % in 2021, while physical assets declined in 2021 from 44% to 35%. In the same manner, insurance has grown faster than traditional bank deposits, etc.

Significance for Professionals and Enterprises

An account aggregator evolved as a game changer for lending space. It is completely technology-driven in the right direction to create a robust and revolutionary ecosystem for lending. AA serves the banks and other market lenders to adopt an end-to-end digital approach for loan process and lending based on account aggregator financial data, which also helps customers, professionals, and Enterprises to avail loans anytime, anywhere easily from lenders with a great experience of digital revolutionized lending process with a seamless effort. AA has transformed the whole lending process faster and wealth management for customers very cheaply. Now, loan seekers (customers, professionals, or enterprises) are not required to move across the time-consuming loan process. Once they register with an account aggregator, they are not supposed to undergo the registration process every time, and their financial records will be shared securely and safely for future lending usage, depending upon their needs and choices. To ease the lending process, eight new banks recently joined the network of accounts aggregators such as Axis, ICICI, HDFC, Induslnd Bank, State Bank of India, Kotak Mahindra Bank, IDFC First Bank, and the Federal Bank. In 2023 January, approx. 266 entities are registered as financial information users on an account aggregator network. 54 banks and 24 life insurance companies, along with other entities, joined the network of an account aggregator.

What Are NBFC Account Aggregators?

NBFC account aggregator refers to an entity engaged in the aggregation process of financial data of customers on a unified platform just to deliver such information to other associated financial institutions that lay out different financial services. AA acts as an intermediary between loan-seeking customers, financial information providers, and the user of such information, as they transmit data in a seamless, hassle-free, safe, and secure manner after complying with all the strict directions laid by RBI. Account aggregators can be trusted as a reliable platform to digitally share financial information, like the paper documents previously issued to the public. Moreover, it reduces the financial risk for lending institutions as only the relevant information is being shared using this aggregator’s network. The financial information being collected from the customers is not held to be the property of such an account aggregator to use in a way for making profits.

Salient Features of NBFC-AA

An individual or customer is free to decide and hire the services across different account aggregators. Account aggregators are more likely to convert the whole lending process into a simple process and benefit from managing wealth most cheaply with secured customer financial data.

NBFC-AA expedite the lending process and enhances the success rate of loan services

NBFC-AA takes prior consent from customers while sharing their financial data with lenders, which allows lenders to access the credit background of customers and process the loan request much faster using NBFC-AA-driven technology.

Regulatory Authorities for NBFC-AA

The financial data that NBFC-AA shared with a financial information user (lender) might be registered and regulated by the authorities. The regulators under the Master directions are the RBI, SEBI, IRDAI, PFRDA, and Department of Revenue under the Ministry of Finance etc.

Required no more paper works or KYC every time

 As a customer gets enrolled with the account aggregator network and shares his consent on financial information, in the future, such customers are not required to experience the KYC process again and again. Only customers are required to give consent on a subsequent request for a loan in the future.

A Safe and Secure Transfer of Financial Data

An account aggregator is a data-blind person and is restricted from using consumer data for personal benefits. AA is bound under the RBI master direction to provide the selection option to share financial data, and even customers are free to revoke or cancel their consent. The shared data from the customer’s originating bank is fully encrypted, secured, and transferred to those customer loan-seeking financial lender’s institutions only. AA is not authorized to store or use the stored data.

Quick and less time-consuming process

Account aggregator technologies have changed the manual collection or assembling of financial data. Traditional people need to share their account numbers and passcodes with a third party while availing of loan services. But nowadays, things are changed and updated by the account aggregators system. It is more likely to save precious time, reduce confusion, and build a coordination channel between the banks and customers.

A NBFC-AA (Account Aggregators) can be potentially used

An Account Aggregator ecosystem can be further recognized into 5 major types depending upon their usages.

Lending Purpose

The traditional process of submitting documents and getting approval for loans can be easily replaced by using the signed digital and the financial information being shared from financial information providers like banks and NBFCs to financial information users (lenders). All new credit companies can use the NBFC-AA mechanism to improve the cash flow management of MSMEs¹ and easily improve the economic conditions of these sectors.

Wealth Managing Purpose

The Account Aggregators process is updated with an ability that can easily enhance the existing financial information users to have real-time access to the immediate requirement of customers for loans directly rather than those customers are required to submit their recurring needs periodically.

NBFC-AA System has widened the financial scope

Personal financial applications generally access the customer’s bank statements, which are either uploaded by the customer’s end or such financial apps seeking permission to share the customer’s login details on such finance managing apps. An Account Aggregators process is enough to eliminate those manual requirements that require the customers to upload their documents or share their login details to the finance application. The NBFC-AA system has widened the lending aspect in making reports of the customers than those personal financial apps.

Robo- Advisory

NBFC-AA enhance robo-advisory apps to have real-time access to customers’ financial data shared from financial information providers such as a bank, mutual funds, etc., to create an accurate profile of customers’ financial data.

Accounts Reconciliation

Generally, companies use an accounting process where they are required to enter details such as bank statements and other business invoices to determine about the cash. The NBFC-AA system is more advanced and requires companies to download their bank statement in real time without errors. 

How Do NBFC Account Aggregators Work?

The account aggregator system is typically based on its participants, such as the Account Aggregator (AA), the Financial Information Provider (FIP), and the Financial Information User (FIU), working and associated together in a way to simplify the process of sharing financial information of a customer. 

• FIP as Financial Information provider refers to entities, like the banks or NBFCs, who hold a customer’s financial history and share it according to the financial information User on an Account Aggregator requests. They are more likely to support the customers to access their historical financial information and help them to opt for innovative financial services, etc.
• Account Aggregators are NBFC companies duly recognized by the RBI and facilitate as a bridge or connection in delivering financial information data from those financial information providers (FIP) to financial information User who will serve you the financial services, etc.
• Further, the Financial Information User (FIU) receives the financial information digitally from the Financial Information Provider (FIP) via Account Aggregators.

It is quite easy for the companies who are registered as NBFC-AA with the RBI to consolidate or gather all existing financial data of a customer from its regulators and organize it to check out all the financial asset holdings of a loan-seeking customer. The financial data are usually shared with a financial information user (lender) and might be registered and regulated under the SEBI, RBI, IRDAI, PFRDA, etc. The financial information of data can be shared, possibly based on the customer’s (his/her) consent in writing according to the consent structure as per the RBI master direction guidelines. The shared information will be an asset for a NBFC who is taking information from account aggregators.

The whole working process of NBFC-AA can be summarized using an example- Suppose a person applies for a loan using any lending application. As his loan request becomes visible to a lending NBFC, such NBFC requires the financial history of such borrowers to make an informal decision whether to disburse the loan amount or not. Now, the person is free to opt for the NBFC-AA service system and give his consent accordingly to share his financial data instead of following the old traditional methods of visiting the banks for loan requests. The financial data extraction will hardly take minutes for NBFC-AA to share such data information to that financial information user for lending purposes to borrowers. The whole information is shared using the NBFC-AA route only.

This model can be easily understood with the said example

Account Aggregators in India

The regulating authority approves some approved account aggregators (AA) in India. The AA listed below are responsible for sharing the information from the customers and the financial information users using a secured and efficient encrypted mechanism. They are as follows-

1. National E-Governance Services Asset Data
2. Jio Information Solutions
3. Perfios Account Aggregation Services
4. Cookiejar Technologies
5. Aditya Birla Trustee Company
6. Yodlee Finsoft
7. FinSec AA Solutions Private Limited (One Money)
8. Innoviti Financial Services
9. CAMS FinServ

The Future of NBFC Account Aggregators in India

During the early week of September 2021, the Reserve Bank of India added 8 major banks to the business operations of the NBFC-AA network system. Previously, the Master Direction in 2016 was issued by the RBI regarding the Account Aggregators’ registration and compliance with their business operations within India. The NBFC-AA framework brought revolutionary changes in lending as well as money management using the digitalization process of sharing financial data safely and securely. The NBFC-AA rules by RBI are framed in a way to drive lending services in India by creating and enhancing access to credit and its assessments. Moreover, the NBFC-AA has slowed down the time taken in the loan process and reduced the associated unnecessary costs of lending. As per the reports, the Indian AA market is expected to grow at a compound annual growth rate of 20% between 2021 and 2026 (CAGR). Such growth is possibly the result of a rise in the usage of digital payments systems, fintech startup growth, and increasing demand for financial services among the public.

AA is more likely to help financial institutions ease their credit operations by providing them with secure and safe financial information of customers, reducing fraud risks, and improving the customer’s lending experiences. AA facilitates financial institutions to analyze customers’ behaviour and offer customized loans as per their needs. 

AA has made it easier for customers to manage their financial profiles by providing a single desk to access their financial data. AA has increased the transparency in the market and reduced the errors caused during financial transactions. As per a conducted study, it is claimed by 57% of financial users that they will prefer to use financial services if they have a single desk to manage their financial profiles.

Moreover, the Economic Survey of India has submitted a report from 23 AA network boarding banks that more than 1.1 billion accounts are presently likely to share their financial information on AA networks, and 3.8 million account users are using such AA networks to share their financial data.

NBFC-AA has emerged as a vast source for financing those underserved sections of society, including the small and medium base enterprises business class in India. NBFC-AA are more likely to meet the diverse needs of borrowers most efficiently and effectively rather than considering their vast geographical boundaries. They worked as a key element in transforming the expansion of various MSMEs and self-employed individuals in the country. NBFC-AA system has met the gap in lending, especially in rural and urban areas.

Expand the credit access

NBFC-AA framework helps customers, especially undeserving loan customers with no credit loan history, share their financial status, like income and expenditures, with the lenders. Moreover, such financial data is beneficial for lenders for better creditworthiness. E.g., Micro, small enterprises with low income and individuals with less income.

Such expansion in credit access will somehow benefit the owners of small and medium enterprises, as they can easily avail their financial background from different banks and could easily share the same with a lender for business loans. This will shorten the credit gap in India, which results in SMEs facing a huge credit shortfall. 

Enhance the Credit assessment process

NBFC-AA framework provides a greater and clearer view of borrowers’ financial history, which improves credit assessments among lenders. This will allow lenders to utilize such data to raise their loan default rate and easily profit from lending. Lending companies can easily access data, make an accurate loan risk analysis, and offer loans accordingly.

Reduce timing and costs on lending

By availing effortless financial data of loan-seeking customers, based on NBFC-AA frameworks, has more positively reduced the time taken loan approval process to disburse the loan. Lenders are significantly using the AA framework for loan underwriting and completing the process in less time with less money. 

Financial Data Privacy

NBFC-AA uses highly sensitive data, and all such types of financial data are required to be secured from unauthorized usage. As the RBI regulates the NBFC-AA and is duly registered under the Companies Act, 2013, strict compliance with rules and regulations is imposed upon them to ensure financial data safety and security in terms of their usage. However, NBFC-AA uses advanced encrypted and secured measures to protect their collected data from their illegal users. Further NBFC-AA are required to obtain consent from customers in writing while sharing their financial data for lending purpose with any third party. It shows that the users have complete access and control over financial data, and they can easily revoke or cancel such agreements if required to prevent those data from being further shared.

Challenges and Considerations for NBFC-AA

Infect, an Account Aggregators framework laid by the RBI, has enough capabilities to drive digital lending and open banking operations in the entire country. Yet several challenges require to be addressed for its full potential scope-

Difficulty in Data privacy and its security

Data privacy and security are very important for the customer’s shared financial information, and it must be ensured by an account aggregator to implement a robust security system with various authentication steps to secure and safeguard the vital financial information of customers. The data must be encrypted in nature.

Financial Literacy among Customers

To avail the advantages of an account aggregator framework, there is a requirement for consumer awareness in terms of sharing financial information benefits safely. Most of the customers in the country are not familiar with the term NBFC-AA and its benefits. Financial institutions and governments must associate together and initiate customer awareness programs.

Denial of Financial Institutions for sharing data with a 3^rd party

 An account aggregator’s concept is newly evolved in the market; it might be possible that some financial institutions in the market hesitate to share their customer financial information due to security reasons, even to an NBFC- AA. This factor can also become a barrier for NBFC-AA in serving their customer’s financial services.

Regulatory framework compliance and required strict security policy standards

NBFC-AA are regulated and governed according to the direction laid by the Reserve Bank of India, more likely to create and adopt strict security measures to protect and safeguard customer’s financial data. This might create a huge challenge for NBFC-AA to meet with those standardized regulatory frameworks and security measures.

It is difficult to maintain data accuracy and consistency among various financial institution

This may create and emerge as a new challenge for NBFC-AA because several financial institutions opt for various mechanisms to monitor, store or maintain their customer’s data using different formats. Thus, it will be challenging for NBFC-AA to maintain accurate financial data through consistency among existing financial institutions to provide a good and reliable financial service to their users.

The Reserve Bank- Regulatory Framework for NBFC-AA

The Reserve Bank of India, by keeping in mind the usage and function of an account aggregator in the finance sector, introduced the Master direction to facilitate a smooth and secured-based mechanism to share or transfer any financial records of a customer. There are a few required directions to which a NBFC-AA needs to comply.

Registration

Stage 1 Eligibility for NBFC-AA 

• RBI strictly prohibits that entity, rather than an incorporated company under section 3 of the Companies Act, 2013, to commence the business operation as NBFC-AA.
•  It is also stated that without a proper certificate of registration, no company is allowed to start business operations as NBFC-AA.
• The company must have a minimum net-owned fund of INR 2 crores.

Process of Registration

Stage 2 Application Stage

Under this RBI Master direction, it is required by all companies desirous of an approval certificate to operate as an NBFC-AA must make an application in the name of the Department of Non-banking Regulation, Mumbai, by the specified format Annex-1 duly for the same purpose.

The Concerned authority will consider the application for registration as a NBFC-AA after being satisfied with the following conditions-

• It is necessary for the companies seeking NBFC-AA approval to mention their proper resource to provide services to the customers.
• It is required to mention sufficient capital funds to undertake the business operations as a NBFC-AA.
• The promoter or directors of the companies must be sound, fit and proper.
• From the end of the companies, it is required to have management who is not prejudicial towards public interests.
• The companies are required to have an adequate plan for their robust Information Technology System.
• It is required for the company to have at least a leverage ratio exceeding 7.
• The companies are required to comply with other regulations if passed by the RBI and thus required for compliance by the NBFC-AA to commence their business operation in the interest of the public at large from time to time, are required to comply accordingly upon a timely manner.

Stage 3 In-Principle Approval Stage

• Once the Department of Non-banking within the RBI is satisfied upon the application, it grants-in-principle approval to those companies seeking NBFC-AA, and such grant-in-principle approval will be valid for 12 months.
• Now, the AA is required to fulfil the requirements specified by the RBI before the expiry tenure of 12 months. NBFCs are required to set up a respective technological platform to receive or collect the customers’ financial information in a way that provides the promised services. They are required to complete all the legal formalities and any other documents and be ready to start their operations as an NBFC-AA according to the terms and conditions specified by RBI under the in-principle approval.

Stage 4 Final Approval or Registration

• Suppose the Reserve Bank of India deems fit and satisfied that the company has completed all the terms and conditions required, per the In-principle-Approval. In that case, RBI will allow such company to be registered and operate its business operation as NBFC-AA.
• The RBI has also vested the same rights to cancel the certificate of NBFC-AA in case it finds that the company is now not capable of performing its business operations as NBFC-AA or
• Either the concerned company further fails in complying to the rules and regulations for the NBFC-AA registration certificate issued and required,
• In case RBI dims fit and finds that the NBFC-AA company is not able to hold such certification anymore,
• Either fail to comply with the basic eligibility for NBFC-AA or fail to maintain their accounts, publish, and not disclose financial positions according to any law or order issued by the RBI.
• In case the company fails to furnish its books of accounts, including other relevant documents, for inspection purposes at the time of its demand by the authorities.

Consent to Be Taken from Customers to share information

NBFC-AA will perform their business operation in such a manner to obtain, submit, and further manage their customer consent as per the RBI Master direction. 

It is necessary to ensure that the consent obtained from the customers must be acquired through a standardized consent form by the NBFC-AA in such below specified manner-

• Such consent must include the specific identity of the customer with optional contact details.
• The consent form must include the request for the nature of financial information.
• The consent form must include the intention behind the collection of financial information.
• It also includes the specific identity of the recipients of such financial information.
• Such consent forms must include the URL or any other details from which notification for obtaining consent might be easily forwarded to the customer at each required moment for consent.
• Consent must include its creation date of consent with an expiry period, identity, affixed digital signature, and another attribute if specified by the RBI to include in the same consent format.

Consent can be taken using the electronic form, and the NBFC-AA must inform about all the ingredients of the consent form and the customer’s rights to raise any complaints related to any future dispute with the concerned authorities for the time being if their dispute is solved.

NBFC-AA must support their customers with a facility to revoke or cancel their consent if they find it or can revoke it for some specific parts. In case of consent cancellation request, NBFC-AA will offer a newly made agreement with the financial information service provider.

To Comply with Data Security Guidelines for NBFC-AA

NBFC-AA platform is completely based upon technology, thus requiring ensuring that the data collected or submitted from the end of the customers is secured as required under clause 8 of this master direction. The NBFC-AA must comply with the Information Technology Act 2000 along with the Information Technology (Reasonable Security Practices and Sensitive Personal Data) Rules, 2011.

NBFC-AA platforms are required to make sure that they are complying with the given RBI directions below-

• NBFC-AA (account aggregator) platforms must mention their suitable practices, including policies, implemented by them to ensure the safety of customer information.
• It is required for NBFC-AA platforms to clarify specifically about the customer’s consent while collecting any financial information from them and need to mention that such collected information is meant for lawful purposes only.
• NBFC-AA Platforms are restricted from requesting to store customers’ credentials such as passwords, PINs, private keys, bank account, credit- -debit card details, etc., used to authenticate customers to the financial information provider.
• The NBFC-AA platform must specify the kind of technology used to save the customer’s sensitive data and further comply with the directions of RBI in the future.
• NBFC-AA Platforms are required to adopt an appropriate disaster risk management system, and business continuity must be performed in the same place.
• RBI directed the NBFC-AA platform to cooperate with the information system audit of their internal systems, which will be performed once every two years duration through a CISA (Certified External Auditors). Such externally conducted reports must be furnished within 1 month to the Regional Department of Non-banking Supervision of the bank as per the jurisdiction-based NBFC-AA.

Customer Grievance Mechanism

• NBFC-AA Platforms are more likely to opt for a board-approved policy to handle customer grievances or disputes.
• NBFC-AA platforms must comply to resolve their customers’ disputes according to the time frame provided in the board-approved policy. Further, address the same complaint for not more than a period of 1 month.  
• NBFC-AA platform must disclose customer-based information affixed on their business website in a clear and simplified manner. Such conditions need to be published in English, Hindi, or any other local language as preferred by customers.
•  Customers are required to easily access Toll- the free number or any customer helpline, including the nodal officer contact details to raise disputes. If any dispute is still unresolved, customers are free to appeal to the bank.

Risk Management Committee For NBFC-AA

• NBFC-AA platforms must adhere to a drafted framework for managing their business operation risk. They must ensure that they are equipped with a sound or advanced robust technology framework, with highly rated security systems with more reliability and information recovering abilities to protect customer-based financial information, etc.
• The NBFC-AA risk managing committee must consider factors such as reputation, customer confidence, consequential impact, and complying with other legal aspects regarding investment controls and computer security measures with the operational back facility. 

Prior Approval From Bank in Case of Acquisition or transfer of control of Account Aggregator (AA)

• NBFC-AA are required to obtain prior permission from the bank in case of any takeover or acquisition of control of an NBFC-AA that might be the result of a management change. Any change in the shareholding of NBFC-AA, in terms of an increase over the period, might result in the acquisition or transfer of 26 per cent shares of such NBFC-AA.
• NBFC-AA is not required to take any prior permission from the bank if any shareholding gets increased by more than 26% due to its buyback of shares or results from an order of the court. Then it would be required to report about the same to the bank within 1 month from its valuation date, etc.

Customer’s Rights

• It is the right of the customers that NBFC-AA (account aggregator) will allow the customers to access their duly provided consent at any time, along with the permission to know about the financial user with whom their financial information has been shared.
• NBFC-AA (account aggregator) is strictly prohibited from operating on that business rather than its primary-based business of NBFC-AA, even if it is requested from their customers’ end to provide access to such information.

Conclusion

NBFC-AA provides a secure and efficient method of sharing financial information with the concerned financial users. NBFC-AA is determined to protect financially shared data using an encrypted format and other secured protocols. Instead of many challenges for NBFC-AA, it emerged significantly and rapidly evolved India’s financial market. Most people in the country are not aware of the AA network and its benefits. As we continue towards more digitalization, the AA  will offer a more efficient financial system that ultimately has the potential to bring prosperity to citizens. The MSMEs, having no proper credit history, can easily tap on service to avail credits and could easily expand their business operations. AA will also improve the ability of customers to make proper financial decisions.

FAQs

1. https://msme.gov.in/