Small businesses in India have long struggled to gain access to formal credit. Even before the COVID-19 pandemic, a staggering 92 percent of them lacked such access. India’s micro, small, and medium enterprises (MSMEs) sector faces a significant credit gap — between $250 billion and $300 billion. This is because credit access is skewed towards larger firms and those with tangible assets. That leaves MSMEs and individuals without collateral struggling to obtain loans. Even if they find a lender, the loan terms and conditions are often harsh or fail to meet their specific needs.
India’s introduction of a new architecture called Account Aggregator (AA) could revolutionize the national credit landscape , making it easier for businesses and individuals with limited financial backgrounds or asset-backed collaterals to access formal financial institutions.
To comprehend the significance of AA, it is essential to understand the India stack — a Digital Public Infrastructure (DPI) established through a public-private partnership. DPIs are interoperable digital building blocks with open standards and specifications that institutions and organizations can use to offer different services. The India stack consists of three interconnected layers that provide a digital identity to every Indian while facilitating easy, cost-free, mobile-first digital transactions. These layers are the foundation on which the AA architecture has been built. The stack uses the ecosystem created by each layer to operate an architecture that is projected to supercharge India’s credit environment.
First Layer: Identity
Box 1: Identity revolution
Meet Sunita. She lives in a village in the state of Uttar Pradesh with her husband, a small farmer, and their two children. To supplement their income, Sunita sells vegetables and pickles to friends and local shops. Sunita and her family do not have a bank account because the banks require multiple government-issued documents for authentication. These are complex for Sunita to obtain, making it difficult for her to open a bank account.Banks are also hesitant to open an account for her because it is costly to authenticate the information she would provide if she could. The high-resource investment required for Know Your Customer (KYC) procedures and other criteria make it even more difficult. The lack of a bank account prevented Sunita from becoming part of a formal economy. India’s digital identity system — known as Aadhar — provided Sunita, and millions like her, an identity that was safer and accepted by all.
Until 2010, the vast majority of the Indian population lacked any form of reliable formal identification. This posed a significant challenge for the government and the private sector in delivering essential services to the people, especially in rural areas. In 2010, the Indian government introduced the Aadhaar number, a unique identification number issued by the Unique Identification Authority of India (UIDAI). This marked a turning point in the country's digital transformation journey.
Aadhaar, which means "foundation,” is a 12-digit number that serves as an individual's biometric identity. It comprises an individual's biometric (fingerprints and iris scan) and demographic information, including their name, age, gender, and residential address. Aadhaar is the first layer of the India stack. It has enabled the government and private sector to improve efficiencies and innovate new products and services using Aadhaar.
Before Aadhaar, only one in 25 people had any form of formal identification, and just one in four had bank accounts. Aadhaar has transformed the authentication ecosystem in India and replaced multiple government IDs, such as passports, PAN cards, ration cards, and voter IDs, for authentication. Today, Aadhaar is ubiquitous: it provides easy and quick authentication to millions of Indians, helping to empower citizens.
The Indian government has been pushing for zero-balance bank accounts under the Pradhan Mantri Jan Dhan Yojana (PMJDY), opening over 450 million accounts by 2022. Aadhaar has been instrumental in achieving this goal, as it has facilitated the KYC process, reducing the cost of conducting e-KYC from $12 to 6 cents. This has helped extend banking to millions of Indians, improving financial inclusion and reducing corruption in government services access for the poor.
Aadhaar has facilitated the transfer of over $310 billion to more than 6 billion beneficiaries under direct benefit transfers by the government. This has been a significant achievement for India — it has enabled the government to deliver various social welfare schemes directly to the beneficiary’s bank accounts, cutting leakages and ensuring that the benefits reach the intended recipients.
Read More at https://blogs.worldbank.org/developmenttalk/indias-digital-transformation-could-be-game-changer-economic-development
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