Is Government Seeking Adhaar Use for NBFCs against SC Ruling?


Prohibited by the Supreme Law, but the Indian Government is still looking for NBFC institutions to use Aadhaar eKYC

The Ministry of Finance of India has revealed recently that it is negotiating with the Reserve Bank of India (RBI), the Unique Identity Authentication Authority of India (UIDAI) and the National Payment Corporation of India (NPCI) to discuss whether to allow non-bank financial institutions to access NBFC based on Aadhaar KYC program of the system.


NBFC companies, including insurance companies, fintech lenders, P2P lending platforms, and currency exchange, may be able to use Aadhaar ’s data when digitally identifying customer credentials.


Once the plan is approved, NBFC agencies will not only be able to obtain the support of the largest identity database in India in risk control business, the indirect benefits will be the reduction of capital costs and the time-consuming problem of physical KYC procedures. The two major problems at present It is the main factor hindering the development of these NBFC institutions.


The use of Aadhaar-based digital KYC program will greatly improve the efficiency of customer acquisition.


What Adhaar Forbids?

The use of Aadhaar goes from no prohibition to prohibition by law.

In 2018, the Indian Supreme Court issued a series of rulings on Aadhaar's long-standing dispute. 

On the one hand, it is affirmed that Aadhaar as a unique identity authentication project is crucial to the development goals of the Indian country.

On the other hand, some regulations in the "Aadhaar Act" were also adjusted in this ruling. Among them, what is closely related to the interests of NBFC institutions today is that the Supreme Law also defines who has the right to search Aadhaar data and who has no right.


What are the regulations on Aadhaar for Bank Account and PAN Card?

Among the main points of the ruling of the Indian Supreme Court on Aadhaar, one of them stipulates that Aadhaar is mandatory only when submitting income tax returns and PAN distribution, and is not necessary for opening a bank account or when registering a SIM card with a telecommunications operator Options.

This means that including telecommunications companies, NBFC institutions, banks are prohibited from using the Aadhaar database for KYC purposes.


Due to the above Supreme Court ruling, the Indian government has been hesitant to allow the NBFC agency to connect directly to the Aadhaar database.


Therefore, to allow NBFC to connect directly to Aadhaar, the greatest possibility is through a third-party entity (including NPCI).


Influences of Adhaar Rules

After the ruling of the Supreme Law of India came out, fintech practitioners expressed dissatisfaction. Among them, the regression of development is the most unacceptable.

Practitioners said that if the company’s KYC program is returned to the previous physical means, the cost of providing services to customers across the industry will increase significantly, especially in rural India and inland areas. Of customers will become direct losers, and the development of a cashless society will be hindered.


Government coercing Adhaar Use by NBFC

On the other hand, the management guidelines for digital payment institutions issued by the Central Bank of India RBI in 2017 were also affected.

RBI originally required the digital payment company to complete the deployment of the complete KYC process on February 28, 2019 (after the first extension, until August 31, 2019), that is, the payment company must ensure that the physical verification or biological characteristics of the user are completed an examination.


For example, the unicorn company Paytm has even announced that it will invest more than US $ 500 million in the deployment of a complete KYC process within three years. The impact of the Supreme Court ruling on the industry is evident.


PCI and NASSCOM on Aadhaar Use

In the past year, the Indian Payment Commission (PCI) and the Indian Society of Software Service Companies (NASSCOM), which represent industry organizations representing payment and settlement systems companies, have successively sent letters to RBI and other relevant organizations requesting that the complete KYC process be postponed again. deploy.


NASSCOM also requires the government to allow regulated entities to directly access the Aadhaar database. The government has responded positively to this request-so, the NBFC that is regulated by RBI, meets the UIDAI licensing conditions, and meets security and privacy standards directly There is still a glimmer of hope for UIDAI seeking eKYC cooperation.


At the same time, fintech companies are also seeking additional digital KYC solutions, including video KYC means. It is said that RBI is also considering using DigiLocker platform of Electronic IT Department and other similar options to meet KYC needs.


India's supreme court issues new Aadhaar ruling

The road to digital finance is not a straight road. As one of the fintech powerhouses, India stands out with its domestic solutions to major problems. 

In order to integrate a large portion of the 1.2 billion citizens into the financial system, India has taken a number of demonetization measures. For example, India uses the Aadhaar program and a series of APIs to provide fintech companies with many digital authentication tools not seen in other countries. But not long ago the Supreme Court passed the latest ruling, which had a huge impact on the Indian fintech community.


What is Aadhaar?

The Indian government operates the world's largest citizen biometric ID system. 

Aadhaar is a biological database based on 12-digit digital recognition. The data includes biometric data such as iris and fingerprint scans. It functions like a social security number and is tied to a mobile SIM card and bank account.

 Aadhaar is the pillar of India Stack, a set of APIs used by the ecosystem of governments, startups, enterprises and developers, serving 1.2 billion Indians with the goal of achieving a cashless society.


Indian fintech startups use databases to authenticate new users digitally, so a powerful database like Aadhaar is very useful.

India’s fintech investment in the first quarter of this year broke the record, with a total of 39 times, compared with only three times in the same period in 2013. And Aadhaar is one of the reasons behind this growth.

For countries with large populations, diverse demographics and geographical locations, identity verification is the real obstacle to entering the modern technological society.


As an e-KYC platform, Aadhaar is particularly useful in verifying the identity of customers who have no bank accounts and bank accounts that are not shown in the banking system.


According to statistics, Aadhaar currently covers 99% of Indians with digital identities.


What will happen?

Earlier last week, the Indian Supreme Court announced that it would prohibit private companies from obtaining Aadhaar data. This means that fintech companies that rely on Aadhaar for loans, mutual funds or insurance need to find other ways to attract new customers.

The cost of startups will increase significantly. Harshil Mathur, CEO and co-founder of Razorpay, an online payment solution provider, said, "Currently, e-KYC verification and entry costs $ 15 per person.

Soon after, using the same verification process, the per capita cost of physical KYC will reach 100 US dollars."

In addition, after the regulations are introduced, the speed of financial services will also be limited. It is estimated that in India, traditional physical certification takes at least a few days, while Aadhaar only takes a few minutes. This ruling will inevitably make it more difficult for local digital companies to compete with financial institutions.


Where does Indian fintech go?

It is expected that the cost and speed of the startup community will be affected. Indian consumers have to accept higher costs and longer processing times. And the impact is likely to be transmitted beyond digital identity authentication, and it will be more difficult for fintech companies to raise funds.


But what is interesting is that the ruling has already triggered comments on the authenticity of digitalization by Indian fintech companies. In the fintech world around the world, the example of "pretending before realizing" is very common. From this perspective, fintech companies tell investors that they are doing digital authentication, but in fact, operations rely more on manual processes.


An anonymous fintech executive said, "The ruling will affect how companies focus on new customers, which in turn will affect investor confidence."

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