What prevents financial inclusion of SHGS?
National and state rural livelihood missions have enabled the formation of more than 86 lakh women’s Self Help Groups (SHGs) in India, and their linkages with financial institutions. SHGs represent a distinctive approach that allows access to low-cost financial services with a process of self-management and development of SHG members.
However, half of these SHGs have not obtained bank loans or actively used banking services. The small size of these businesses and their restricted capital needs contribute to the lack of credit linkage with banks. Banks also refuse credit to SHGs due to a lack of business records, mainly as a result of dealings in cash, and the relatively high cost of servicing these loans. In the absence of a support ecosystem such as an SRLM, women frequently struggle to navigate complex loan application processes and interact with banking personnel. SHGs, therefore, remain an underserved consumer segment.
For SHGs to turn into sustainable, job-creating livelihood enterprises, meeting their borrowing needs is crucial. Account Aggregators are emerging as an effective means to meet these needs.
What is Account Aggregator?
The Account Aggregator (AA) mechanism empowers users to share information between one financial institution where they have an account, and any other regulated financial institution in the AA network.
How do AA features eliminate issues with existing credit infrastructure?
Integration of AA in the lending process has mutual benefits for both borrowers and loan service providers (LSPs). The biggest value of AA for SHGs is in the simplification of credit linkages.
AA reduces the existing know your customer (KYC) process of assessing loan applications from 3-4 days to 10-20 minutes. By replacing existing physical documentation with digitally plugged-in financial data, AA improves the process of credit linkages for SHGs.
AA builds a credit history and proof of creditworthiness by providing a digital record of financial transactions. It gathers financial data from multiple sources, such as banks, mutual funds, insurance companies, and tax authorities, to present a holistic view of the user’s financial information, thereby resulting in better underwriting of borrowers’ financial health.
The process of AA ensures a smoother user journey, which results in lower drop-offs and reduced operating costs. Users simply enter their phone number and approve the request for access, and the system fetches the required information automatically.
Loan disbursement to SHGs using Account Aggregator with LSPs: A sample use case
Sparsh, a collective of five women, came together to form an SHG and have been saving for over a year now. They have deposited their savings in bank accounts and opened a fixed deposit account. Based on their savings, they are now seeking a loan of ₹ 1 lakh to start a business. They are seeking a loan to kickstart operations for their business and invest in machinery.
In our hypothetical example, we explain what the journey of availing loans through AA would look like.
Loan Monitoring of SHGs’ bank accounts to determine loan collectability: A sample use case
Suvidha Limited, a microfinance company, plans to expand into the district of Bhagalpur in Bihar. It has offered over 100 micro-loans to SHGs in the last month based on their credit needs. Suvidha lacks visibility into the SHGs’ revenue streams and a network of partners for loan monitoring. In our hypothetical scenario below, we show how a lender gains confidence in a borrower’s repayment capabilities by loan monitoring in AA.
