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Utilizing the Validation Agent Framework to Support Greater Financial Inclusion for Indian SMEs

iStock 986733472 - Global Banking | Finance

MR - Global Banking | FinanceMohan Ramaswamy, Co-Founder & CEO at Rubix Data Sciences

Rubix Data Sciences became GLEIF’s first Validation Agent in India in March 2022. One year on, Mohan Ramaswamy, Co-Founder & CEO of Rubix, sat down with GLEIF to discuss how this new role in the Global LEI System is enabling Rubix to support greater financial inclusion for SMEs across India.

In 2020, GLEIF launched the Validation Agent (VA) role within the Global LEI System, enabling financial institutions to simplify Legal Entity Identifier (LEI) issuance for their clients, reducing their onboarding time-to-revenue, and future-proofing their institutions for digital innovation.

The Validation Agent role is now performed by more than ten organizations globally, spanning Africa, China, Europe, India, the Middle East, and North America, with Rubix Data Sciences becoming the first India-based Validation Agent in 2022. Since then, Rubix has been actively engaging with key stakeholders and organizations across the region to promote broader adoption of the LEI.

Mohan Ramaswamy is Rubix Data Sciences’ Co-Founder & CEO.

What challenges do Small and Medium Enterprises (SMEs) in India face when looking to break into international markets?

The crux of the challenge for many SMEs is the inability to prove and verify their identity, making it difficult to formally participate in the global financial system. Favorable, or indeed any, access to capital, credit, and trade finance arrangements from banks and government schemes is essential for engaging meaningfully in the global marketplace. Without these vital economic assets, funding working capital needs for imports and exports, delivering quality products and services, driving digital transformation, and attracting skilled talent becomes near impossible. Yet this access requires SMEs to prove who they are.

SMEs are also suffering from a fundamental trust deficit. It is almost impossible to establish credibility and legitimacy with overseas buyers and sellers without a verifiable business identity. In turn, validating the identity of overseas business partners is also difficult.

How can globally recognized verifiable business identities help more SMEs gain access to the capital and trade finance needed to foster greater financial inclusion?

While India has made tremendous progress in fostering greater financial inclusion through the ‘JAM trinity’ (Jan Dhan bank accounts for the non-banked, Aadhar Identity Numbers, and Mobile Numbers), there is still a lot of ground to be covered.

Happily, a verifiable business identity such as the LEI opens doors for SMEs in the financial ecosystem. Once they can prove that they are a valid entity, they are able to build a financial track record with banks, financial institutions, and other lenders. This enables them to access financing on more favorable terms, meaning they are much less likely to fall prey to unscrupulous moneylenders charging exorbitant interest rates.

What’s more, an SME with an LEI will find it easier to transact with large companies as a supplier, customer, distributor, or dealer while also establishing a trade credit history with these companies by accepting and making payments through the formal banking system.

How is Rubix’s role as a Validation Agent helping to facilitate more opportunities for SMEs in the region?

Since becoming India’s first Validation Agent, we have worked to build awareness of the various benefits the LEI delivers and support SMEs to obtain an LEI smoothly. Once obtained, it is possible to unlock access to trade finance and integrate it into domestic and global supply chains. This drives a virtuous cycle that promotes growth and opportunity. What’s more, as SMEs are the backbone of the Indian economy, this will naturally accelerate and increase financial inclusion across the entire country, as well as promote significant inbound capital investment.

Given these benefits, Rubix signed a Memorandum of Understanding with the Federation of Indian Export Organizations (FIEO) in July 2022 to facilitate LEI issuance to Indian exporters and entities. These organizations play a critical role in driving India’s socio-economic growth, and we recognize that equipping them with LEIs is particularly important because it will help them stand out in the global marketplace.

Since then, Rubix has engaged over a thousand FIEO members and SMEs to generate awareness about the LEI. By obtaining an LEI through Rubix, FIEO members benefit from increased trust and transparency with their counterparties, banks, financial institutions, and other stakeholder organizations.

Rubix has also engaged various export promotion councils, including the Gems & Jewelry Export Promotion Council (GJEPC), to build further understanding of the value of obtaining the LEI, particularly for their SME members.

Rubix is also encouraging large corporations to mandate the LEI throughout their supply and distribution chains. This ensures they only transact with those entities whose identity is validated, helping prevent fraud and money laundering and driving comprehensive risk management. This also provides an impetus for SMEs who are part of these large supply and distribution chains to obtain an LEI.

What further benefits is Rubix delivering to its clients through this role?

There has been significant regulatory momentum for the LEI over recent years. For example, banks must comply with multiple mandates from the national banking regulator – the Reserve Bank of India (RBI) – requiring the use of the LEI. The Securities and Exchange Board of India (SEBI) has also mandated the use of LEIs for certain financial intermediaries and capital market participants. The Insurance Regulator (IRDAI) also requires organizations to obtain the LEI for certain transactions.

As a Validation Agent, we are supporting organizations, including SMEs, to streamline and accelerate compliance with these regulatory requirements and guidelines and obtain an LEI seamlessly and cost-effectively. Rubix has also been active in working with banks to issue the LEI to their customers to ensure compliance with the relevant RBI, SEBI, and IRDAI guidelines.

More broadly, we are proud that government organizations such as Prasar Bharati (India’s public service broadcaster) have trusted Rubix to assist them in obtaining the LEI from Legal Entity Identifier India Ltd (LEIL). Similarly, we have successfully assisted large public sector undertakings like the Bank of India in obtaining LEIs for three of its employee funds (Gratuity Fund, Provident Fund, and Pension Fund).

How does the Validation Agent status complement and enhance Rubix’s current offering?

Rubix operates in the risk management domain and has solutions across every stage of the B2B credit risk life cycle. The LEI complements our current set of KYC offerings that help customers establish their own identity or validate the identity of their counterparties. Most importantly, the LEI helps establish the global identity of an entity, and not just in a particular country. This will be especially helpful for Indian businesses, including SMEs.

Rubix has also incorporated the LEI into its Business Information Reports (Cross Border & Domestic) and Due Diligence Reports pertaining to companies, proprietorships, and partnership firms. These reports are relied on by banks, FinTechs, credit insurers, large companies, and SMEs to make risk decisions.

Put simply, we believe that Validation Agent status will help Rubix comprehensively meet the risk management needs of all our customer segments, including banks, FinTechs, companies, insurers, and SMEs.

As the world’s economies continue to ‘go digital’, what role do you see the LEI playing in helping businesses grow around the world?

Globally, the LEI improves transparency, simplifies identity validation, sheds light on relationships between businesses, and helps fight money laundering and terrorist financing. These are imperative for reducing risk in the global financial system.

This is even more important when considering how rapidly digital transformation has redefined the business landscape. New methods and systems are required to effectively identify and validate businesses, which have shifted identity management to the center of global risk management.

In this digitalized world, organizations with an LEI face much less friction when transacting with banks and other financial players. Similarly, transacting with international parties is smoother. As more jurisdictions and regulators adopt the LEI as the identifier of choice, its significance, relevance, and utility will only continue to grow.

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