Landmark reforms: Costs for some, benefits for all

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Shilpa had inadvertently missed the due date on her credit card payment. On realising her error, she promptly paid the overdue amount along with late charges and interest. She then called me to check if it would damage her credit score and her chances of getting a home loan that she had applied for.

This is a sea change from the attitude I have personally witnessed in the 1990s while working with a retail lender. Then, when asked to pay up, a defaulter’s typical response was: “Do what you want to.”

This change has come about due to the credit bureaus, which commenced business in 2000. Job losses during the global financial crisis (2008-09) led to an increase in defaults. These borrowers discovered in later years that their access to credit had been blocked. The lenders they approached knew about their previous defaults -through the credit bureaus.

Both banks and borrowers ultimately gained from information sharing with credit bureaus. As defaults reduced, loans became cheaper, and the market expanded.

But it took more than a decade and a half for the benefits to become apparent. Initially, the banks responsible for sharing data on borrowers had little incentive to cooperate. They had to incur costs in setting up the information-sharing system. The benefits went to the smaller, new age banks that contributed little information (since they had fewer clients) but benefited from the information contributed by their older and larger peers. In short, banks were slow to embrace this reform as the benefits were back ended and not in proportion to the cost borne.

A much bigger transformative reform is taking place currently- the client consent-based Account Aggregator framework pioneered by the Reserve Bank of India (RBI) and adopted by the Securities and Exchange Board of India (SEBI). Other financial sector regulators and government departments may follow soon.

The central idea is simple. The client has right over any information about her and will decide to whom it can be sent. Let’s take the example of a person who wants to prove her bona fides to a potential employer. Today she must download her bank statements, income tax returns, provident fund history, and credit bureau report from each of these entities, collate them, then email or hand over these documents to the employer. The latter can never be sure if these are genuine.

If each of these entities were an Information Provider (IP) in the AA system, then with the job-seeker’s consent the information could be sent directly to the employer. The latter would be assured of the genuineness of the data, and the client would be assured that her data would only go to people whom she has authorised. Decision making could be digitised and become faster.

Add to this mix data from IPs such as health record systems, education record systems, etc as well as authenticated statements from the court and the police that they have no records on her. Further, add the AI and tech prowess that India possesses and we have the making of an economy where decision making is digitised and moves at jet speed. All this while fully protecting data privacy since data is shared only with client’s consent and is not stored at any intermediate point.

With the availability of data about themselves, coupled with the use of technology, common citizens will be able to prove their reputation quickly. As the AA Framework rolls out, many innovators will spring up to offer services to the common citizen.

Implementation of this 100 per cent made in-India AA framework is already underway.

However, once again, the benefits will be back ended. The IPs will have to bear costs at the beginning, while the benefits will accrue to the entire economy, not just them. Hence, all financial regulators will need to push this by setting an end date by which the IPs must comply. Non-financial sector IPs and other sector regulators can draw on the AA framework experience even as the Data Protection Act is passed. Meanwhile, India can’t wait. The financial sector regulators must hasten the slow pace of the furious change that is the AA framework.

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

(A slightly different version of this column first appeared in the Business Standard on May 30, 2022.)

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