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Photo: iStockphoto
Photo: iStockphoto

Milestones India needs to cover in its digital ride

Stakeholders must increase investment in data security and ease processes

The new post-pandemic normal has us working from home, shopping online, and managing money digitally. Thanks to regulatory advancements in 2020, today, it’s possible for you to apply for a loan or credit card from the safety of your home using a phone, complete your KYC through live video, and get your credit line in hours. It’s now possible to get access to financial products, without physical contact.

WHERE IT ALL STARTED

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It’s estimated that over 200 million new-to-credit customers will be on-boarded by 2025. Catering to such a large audience in such a short time required rapid digitization. For that, policy needed to change. Before and during the pandemic, the ministry of finance (MoF) and the Reserve Bank of India (RBI) introduced some prescient changes. Here are three of them.

Earlier, taking credit meant sharing papers and wet signatures, and having a face-to-face meeting with the lender. These processes had to be digitized to cut down the time and costs. It started with amendments to the Prevention of Money Laundering Act of 2002. In August 2019, MoF’s department of revenue approved the use of e-signatures and e-KYC. Aiding this was the development of DigiLocker, a digital storage for receiving, storing, self-attesting and sharing documents such as address proofs.

Then, in January 2020, RBI’s ground-breaking decision to permit video KYC (VKYC) allowed banks to remotely verify customer identity on live video. Weeks later, as the world plunged into chaos due to covid-19, this regulation proved a game-changer. In weeks, VKYC went from an unconventional idea to the mainstay of retail banking, allowing retail lending to resume in the tough April quarter. VKYC is now expected to aid the disbursal of 80% of new-to-bank digital credit in 2021.

Lastly, in December 2020, RBI made another giant leap for digitization by ensuring greater use of the central KYC (CKYC) registry, wherein financial institutions, basis customer consent, can verify customers by referring to the registry instead of initiating the more time-consuming and costlier fresh KYCs. The registry is inter-usable between financial institutions and will reduce the duplication of KYC efforts, optimize costs and allow the future unification of KYC data across financial services.

WHAT MORE IS NEEDED NOW

These changes are ensuring that financial services are now more accessible to everyone—regardless of whether they’re opening their first savings account or applying for the first credit card, whether they are in big cities or far-off towns. It’s the latter category—small-town Indians under 35—which will see explosive growth in new account openings. Apart from speed and cost savings, the other positive is that digitally-acquired customers have lesser incidence of delinquency and fraud, which means lower non-performing assets or NPAs.

As Digital India scales up, the stakeholders—the government, regulators, banks and fintechs—must increase investments in data security and establish and improve information security systems. It is important that India gets robust data protection laws this year. The stakeholders must also work together to improve the fintech ecosystem.

In this regard, there are two asks from the regulators. One, enhance the limits on loans disbursed through OTP-based e-KYC. Credit card accounts must also be allowed to be opened this way. Currently, RBI’s KYC Master Direction caps instant loan accounts at 60,000. However, BankBazaar research shows that the average personal loan size in 2019 was 2.61 lakh in metros and 2.84 lakh in non-metros. The caps should be raised to 6 lakh. A linked ask, of UIDAI, is to allow non-bank financial institutions such as insurers, mutual funds, NBFCs, Sebi-registered investment advisers, and regulated PFRDA entities to use Aadhaar for account openings for convenience and cost reduction.

Two, VKYC norms can be tweaked to ease challenges in the current process. Some customers are unable to complete VKYC as the offline Aadhaar XML upload process and the e-PAN submission process are cumbersome. To ease such cases, first, a PAN verification report, got through the customer’s DigiLocker, should be treated as the equivalent of e-PAN in the VKYC process. Second, any officially valid document that can be digitally verified must be allowed to be used as an alternative to Aadhaar XML.

The regulatory changes enabled by the government and RBI came as timely boosts for the digital economy, and made paperless and presence-less financial inclusion an everyday reality. The momentum must be maintained in order to ramp up financial inclusion and stamp India’s place in the fintech world.

Adhil Shetty is CEO, BankBazaar.com

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