As I pointed out in my article last week, with the proliferation of smartphones and falling data costs, DigiLockers coupled with e-signature offer the promise of facilitating financial inclusion by reducing CAC and compressing TATs. However, there is scope for greater proliferation of the use of DigiLocker and expanding the number of use cases that DigiLocker can serve. As mentioned in my previous article, easing Requestor-side access for regulated financial entities by removing/reducing the number of hoops they have to jump to get access to the repository is one potential way to proliferate use. This article will highlight two additional policy actions facilitative of the proliferation of DigiLocker for financial services use cases. Firstly, there is an urgent need for the sectoral regulators including the RBI especially, to issue a circular to banks and NBFCs recognizing and encouraging the latter’s use of DigiLocker.
Secondly, while as conceived the original DigiLocker system was envisaged with regard to individuals and not businesses, it is important to recognize that the long tail of Indian entrepreneurship, i.e., the micro and small entrepreneurs, operate their businesses through/as proprietorships. Onboarding GSTN as an issuer offers the promise of significantly enhancing the utility/use case for DigiLocker. This article will make a case for that.
Bottlenecks in the DigiLocker Ecosystem
Market practice and precedent in India will show that financial sector constituents derive comfort from their own sectoral regulator “green-lighting” a technology. So, an important complement to easing the hoops leading up to the access is regulatory recognition of DigiLocker by RBI and comfort to its regulatees.
Subject to borrower’s consent, a simple circular addressed to banks/NBFCs recognizing that they can:
Rely on the authenticity of the documents pushed to the DigiLocker by the issuers, and treat them at par and equivalent to the original documents
Rely on the e-signed documents stored by the subscriber subject to the law applicable to e-signed documents
This will considerably catalyze their interest in onboarding and leveraging the DigiLocker ecosystem.
Secondly, 40% micro and small businesses presently rely on informal sources of finance at interest rates that are, on an average, twice as high as the formal financial market. As is well-known, they are excluded from the formal financial system owing to lack of collateral and thin/absent credit bureau records. Furthermore, formal lenders avoid micro and small businesses because relative to the costs incurred in due diligence and verification of supporting documentation, the ticket-size demand by these businesses is low making it unviable.
Enactment of the GST Act has created a potential business use case for DigiLocker to facilitate these hitherto excluded businesses. Specifically, to the extent these businesses are formalized by reasons of being subject to GST laws, onboarding GSTN as one of the issuers will enable requestor access to a repository of verified (by counterparties) invoices submitted by businesses covered by the Act. Notably, the data contained in GSTN repositories is presently not available to any of the lenders for credit decisioning GST-compliant businesses directly. Onboarding GSTN as one of the issuers on DigiLocker will facilitate that access.
1. Regulatory Comfort
At steady state, just issuing a Circular recognizing/encouraging the use of DigiLocker gets banks, NBFCs and other FIs access to:
365 million PAN records for verification (Income tax departments, GoI/states is an onboarded issuer)
681 million driving licenses and vehicle registration certificates (Ministry of Road Transport & Highways is an onboarded issuer)
Over 1 billion digital Aadhaar (UIDAI is an onboarded issuer).
Once enabled, FIs and banks can directly/indirectly nudge the Users on the platform. Cross-group network effects will also catalyze user onboarding on DigiLocker. This is consistent with the strategy followed by multi-sided platforms to solve the chicken-and-egg problem they face. Once they are on the platform, the User can upload and e-sign documents relevant to due diligence of the lenders including PDF bank statements, Form 26 AS and other ITR documents. Thus, the DigiLocker acts as an aggregator of all relevant documents that a regulated lender can access in a consolidated manner. Further, to the extent the User has e-signed the documents, fraud-risk is mitigated.
**2. Onboard GSTN as Issuer **
As the BCG-Omidyar Report points out, roughly 9.2 million micro, small, and medium enterprises are GST-registered. About 75% of the 1500 MSMEs surveyed leading up to the Report reported being comfortable sharing data digitally. The shift to online reporting has created a trove that is verified, granular and current (filing frequency is monthly/quarterly). Onboarding GSTN as an issuer on DigiLocker will make it easy for the lending ecosystem to access the GSTN repositories/enable the subscriber to access and make available the relevant invoices through a pull-based API.
*About RupeePower: *
RupeePower is a leading CreditTech company in India. RupeePower’s platform “CreditOn” is a comprehensive digital-first product suite that enables banks & lending companies to transform themselves into state-of-the-art digital lending enterprises at scale. CreditOn has created success across banks & lending companies with names like State Bank of India, Kotak Mahindra Bank, Standard Chartered, RBL Bank, YES Bank, Fullerton India, AU Small Finance Bank, and Edelweiss. The platform has enabled these lenders to disburse over USD 4 billion in retail and SME credit to roughly 2 million customers over the last four years.