Creating a balance sheet for every Indian

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When our household help, Sapna, asked for a substantial loan, my spouse suggested I assess her financial situation and guide her. 

Sapna and her husband receive their salaries in their bank accounts. Analysing their bank passbooks helped me understand her cash flow situation. They were paying equated monthly instalments (EMIs) on a couple of consumer durables loans and a monthly life insurance premium. The balance was withdrawn as cash. They had no other assets except a small plot in their village and some jewellery. 

The cash withdrawn each month was barely able to cover her rent and other household expenses. The loan from us would be used to pay back a high-cost, informal loan. 

A cash flow analysis revealed that by marginally increasing the loan amount from us, she could repay both, the informal loan and the consumer durables loans. The savings on EMI payments would enable her to repay our interest-free loan and also enable systematic investments in a mutual fund. By surrendering her money-back insurance policy, she could purchase term and family health insurance policies. Selling her plot could finance the purchase of a house in Mumbai. 

It took me time to provide Sapna with this full-service financial planning service as she struggled to provide the required information: bank passbooks, policy details, loan details, and details of her other assets. 

Sapna’s case highlights the potential of the Account Aggregator System (AAS) in assisting Indians collate their financial information for actionable advice. If Sapna had been able to use AAS, she could have gathered the required data with a few clicks. (Data from mutual funds, demat accounts, National Pension System and Goods and Services Tax (GST) are also available.) Since the information arrives in a machine-readable format, intelligent software can reduce the time required to process it and provide suggestions. 

However, Sapna is not allowed to have her data directed to her DigiLocker so that she can share it. As a registered entity, if we treated her as a prospect and used AAS to access her data, we would not have got any details about her bank accounts (as joint accounts are currently not covered by AAS), or details of the surrender value of her insurance policy (that information is not provided by AAS). Information on loans, credit reports, and immovable assets is also not covered by AAS. Hence, AAS in its current format cannot help provide faster advice to the likes of Sapna. 

The Reserve Bank of India (RBI) governs the AAS. It is one of the finest examples of what cross-regulator coordination—between the RBI, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory and Development Authority and GST can achieve. The finance ministry has also been a firm supporter of AAS. 

Despite the work put in by the regulators and support from the finance ministry, AAS has not had the desired impact due to the limitations explained above. 

Recognising its potential, K V Kamath, the doyen of Indian banking, has given a clarion call for AAS to “enable the creation of a balance sheet for every Indian”. This potential can be realised if a few steps are taken: 

  • The citizen is allowed to get her data into her DigiLocker account and share it.  
  • Data on jointly held accounts and data like insurance surrender value are allowed to be shared.  
  • Data related to loan accounts, credit reports, income tax, Employees’ Provident Fund Organisation, small savings and immovable property are made part of AAS.  
  • The inevitable initial glitches are ironed out quickly.

Truth be told, a population-scale digital infrastructure like AAS can have a revolutionary impact on the lives of all Indians. It will also allow the investment advisory profession to shed its elitist tag and deliver on the promise of a financial plan for every Indian. The potential is bound to be achieved eventually, but a few steps by the regulators can deliver results in months instead of years.  

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; X (formerly Twitter): @harshroongta

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of or the Business Standard newspaper

Mandatory disclosure by SEBI

(A slightly different version of this column first appeared in the Business Standard on December 18, 2023)

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