Opinion | Five things that can strengthen the digital KYC verification landscape

Thanks to the recent regulatory initiatives by the government, paperless and presence-less finance is now a reality in India. The introduction of video-based customer identification process (VCIP), digital KYC (know your customer) norms and digitally-signed documents sourced through the DigiLocker are some key reforms powering India into the next phase of digital financial inclusion. That said, more needs to be done. Here are five key suggestions to aid recent regulatory initiatives post the budget announcements. These suggestions include long-standing items along with some new ones that require attention on account of recent regulatory developments in the fintech space. Some of these have been a part of post-budget interactions with the finance minister to fast track credit growth.

Higher borrowing limit via OTP-based e-KYC: Currently, you can borrow up to ₹60,000 through a loan account opened via OTP-based e-KYC. This limit needs to be increased to meet the average loan requirements in the digital era. The average loan size through the digital mode, on the basis of our market research, is approximately ₹2.61 lakh in metros and ₹2.84 lakh in non-metros. For financial institutions other than banks, only offline Aadhaar authentication is allowed for KYC. This curtails their ability to go truly presence-less and keeps operational costs high. In a maturing digital ecosystem, the Reserve Bank of India’s (RBI’s) KYC Master Directions (KYC-MD) should raise the cap to at least ₹6 lakh. This will enable hassle-free access to small loans for retail consumers and SMEs. Similarly, credit card issuance should also be allowed via OTP-based e-KYC. The KYC-MD must be amended to explicitly allow it.

Explicit CKYC mandate from RBI: An explicit mention by RBI is required in the KYC-MD to the effect that CKYC registry application programme interface-level checks should be considered as “full KYC” by banks and NBFCs. Further, an explicit provision in the KYC-MD, mandating regulated entities to upload their customers’ KYC records with the CKYC registry within 10 days of an account opening will result in greater industry adoption of CKYC registry and uniformity of KYC records, as well as document standardization. This will enable financial institutions to focus on their core businesses and reduce compliance cost and additional due diligence processes for customer on-boarding.

Fintech-bank collaboration on VCIP: RBI’s recent, ground-breaking announcement to allow the use of video KYC is a huge leap for digital finance. The KYC-MD now allows RBI-regulated entities to conduct video KYC for on-boarding customers remotely. However, the process leaves out fintech entities capable of providing technology platforms and VCIP solutions that can be leveraged by banks for seamless customer on-boarding. The current KYC amendment should be expanded to allow banks and NBFCs to collaborate with fintech entities in this regard. Many fintechs have prepared the requisite tech solutions that meet the requirements of KYC-MD. KYC amendments should allow fintechs to assist banks and RBI-regulated entities with VCIP solutions, provided the final approval on VCIP authentication remains with the bank.

Online Aadhaar authentication access for non-bank entities: At present, only banks are allowed to use Aadhaar for online authentication. Entities such as insurance and mutual fund companies, NBFCs, investment advisers, PFRDA intermediaries and fintechs which are regulated should also be allowed Aadhaar access for online account opening, cost reduction and overall convenience to customers.

Fast-tracking of the loan service provider framework: Increasing the credit flow to MSMEs, which are envisioned to contribute as much as 50% to India’s GDP, is key to realizing the Indian economy’s dream of scaling the $5 trillion mark. While the government has already taken several steps to minimize this sector’s over-reliance on informal credit channels, it will achieve further success if loan service provider (LSP) licences, and thereby licenced access to account aggregator and GSTN, are made available to qualifying fintechs for better and faster loan disbursal for MSMEs and retail borrowers. The LSP licence framework, requirements and application process need to be communicated by the finance ministry and RBI, so that LSP platform providers can apply and start building platforms for MSME credit delivery.

The recent amendments to the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, and KYC-MD are positive steps towards providing different alternatives to digitally on-board customers in a paperless, presence-less manner. The success of digital KYC is necessary, and concerted efforts from financial institutions as well as the RBI are needed. This will enable credit access and financial inclusion for every Indian citizen.

Adhil Shetty is CEO, BankBazaar.com