The framework aims to improve access to financial services and empower individuals to take control of their finances.
In an interview, Nilekani emphasizes the importance of making credit, commerce, and product delivery accessible to everyone to create a fair and equitable foundation for commercial activity. Edited excerpts:
Are you satisfied with the progress that AA has made?
The journey of AA has been on for over six years (since 2016) when RBI (Reserve Bank of India) already had an AA regulatory framework defined at that time. N.S. Vishwanathan was the deputy governor of RBI at that time and was one of the principal architects of this regulation. The apex bank essentially created a techno-regulatory framework along with the right APIs, (application programming interfaces), to build a fully digital and highly scalable AA framework. AA has been approved at the FSDC (financial stability and development council) level; so, all financial regulators (in India) are aligned with it.
You have likened AA to the unified payments interface (UPI) of data. What hurdles need to be overcome, including interoperability, reliability of networks, and a grievance redressal mechanism?
Building a national ecosystem of this size does take time because there are many moving parts. That said, all the challenges you described are common to any national ecosystem project. But the general principle of interoperability applies here just like any other national project like UPI or ONDC (open network for digital commerce). Of course, everyone has to build the tech and make it work. And the ecosystem does require a dispute resolution body, which is being planned using the ODR (online dispute resolution) approach. I personally am quite bullish now that it (AA) has reached a take-off point, and recently the government took the very positive step of notifying GSTN (Goods and Services Tax Network) for FIP (financial information provider), which opens up the case for business lending. Given my experience with these projects, I have seen that while it takes many years to bring ecosystems like Aadhaar and UPI to the point of take-off, once you do so, the usage spreads rapidly.
How does AA tie up with the India Stack and other ecosystems such as Aadhaar, UPI, and ONDC?
In the first phase of this transformation, we essentially got the transaction efficiency that India required. So, Aadhaar made it very easy to authenticate and do an eKYC (online know-your-customer) to open a bank account or get a mobile connection. DBT (direct benefit transfer) made it very easy to transfer money into people’s bank accounts, and more than $310 billion has been transferred, with more than six billion beneficiary transactions. UPI has made payments free and high volume and instant—from any app to any app and any bank account to any bank account. Last month, UPI did 7.3 billion transactions. The rise of 4G networks (and now 5G) has enabled cheap connectivity. And, of course, smartphones have become common.
What are the next steps, and what do they herald?
The second phase, in my view, has three dimensions to it. One is using the AA framework to democratize credit so that millions of consumers without any credit history, and millions of small businesses that could not get a loan earlier, now have access to credit. India’s credit to GDP ratio is relatively lower when compared with other countries (less than 60%), and even then, a lot of credit is going to the big players, while the small businesses and new consumers are not getting access. This (AA) will make credit accessible to both these categories.
This will create massive momentum for equitable and democratized economic growth—spreading the benefits of technology by making lending accessible to small consumers by accessing their digital footprint. This is known as information collateral, as opposed to asset collateral, where you use assets to decide whether a person is worthy of a loan. Information collateral uses the sales, purchase, or even your tax information to decide whether you are a credit risk or not. AA makes it easier to discover a borrower. It ensures there are adequate data to judge the credit risk of a borrower, and because of digital payments, you can design the framework in a way to ensure that the repayments are done digitally and built into the cash flow of the small businesses and consumers. Extending credit in this manner to small businesses and individual borrowers is the key to equitable and inclusive economic growth. The second one is the democratization of e-commerce through ONDC, which allows any supplier to list its products on the ONDC protocol, thus enabling any consumer to buy, and anyone can deliver it.
The third is the transformation of logistics with the government enabling good infrastructure, good roads, airports, ports, multimodal parks, etc., and the single national market that GST and E-Way Bills and RFID (radio frequency identification) based FASTag system has created. And then, there’s a huge amount of private innovation happening in the logistics sector, too, with multiple startups coming in for last-mile delivery, streaming the fragmented trucking market, etc.
So, the three big revolutions will be—democratizing credit through AA, democratizing commerce through ONDC; and essentially making the delivery of products much simpler and cheaper with logistics’ transformation. These three steps will lay the foundation for equitable commercial activity for both goods and services. India will move from a pre-paid cash informal economy to a post-paid formal cashless productive economy. This, in turn, will lead to higher tax-to-GDP collections as formalization and compliance drive tax revenues.
You have said that these frameworks can be extended to sectors beyond financial services, such as healthcare.
The AA framework’s first, and very powerful use case, is in financial services, which is being led by RBI under the leadership of the finance ministry. But it can be applied to other sectors. For instance, the same AA architecture is being used in the health stack, which is being led by the National Health Authority under the leadership of R.S. Sharma. They are looking at applying the same principles--interoperability, etc., in the health sector. Technically, this architecture can be used for any data. For example, if I want to carry my education certificates and skills experience when scouting for a new job, I can use the AA framework.
What is the scope of misuse in frameworks such as AA?
AA requires a licence from RBI. The system has to notify the Financial Information Providers (FIPs). All banks, and now GSTN, too, are FIPs. If there’s any regulatory gap, however, I am sure they will be plugged in as the frameworks evolve.
Also, what if someone makes a copy of the data?
The consent architecture of the AA framework works thus that when I give my data to a lender (called a Financial Information User, or FIU) for a loan, I can also put restrictions on how the data can or cannot be used. If the lenders violate those restrictions, they may lose their ability to participate in the ecosystem. There is a consent artefact in the AA framework that defines the terms of consent.
