Sa-Dhan, an industry lobby of microfinance organisations, has written to the banking regulator and government seeking permission to conduct e-KYC authentication for client on-boarding.
Currently, NBFC-MFIs are not permitted to do e-KYC for their customers. Only MFIs that are operating as banking correspondents of commercial banks can do e-KYC for that category of customers. E-KYC helps lending institutions upload documents of customers digitally.
“There is a lot of stress on contactless banking. But NBFC-MFIs are unable to do this because of unavailability of the e-KYC facility,” said P Satish, executive director of Sa-Dhan to Moneycontrol.
MFIs are institutions that typically borrow from banks and on-lend to small borrowers at a margin.
Sa-Dhan has also written to UIDAI with the same request, Satish said.
e-KYC had helped in reducing the turn-around time of loan processing to a great extent for the MFIs and had helped clients to avail loans in a timely manner. It had also helped in checking duplicate Aadhaar cards being submitted to avail loans, which poses as a critical operational risk for the sector, Satish said.
“However, as NBFC-MFIs and MFIs were disallowed from using e-KYC, the microfinance sector and its clients have been facing a lot of issues. Due to the absence of e-KYC, loan processing time has increased. Offline modes of KYC verification leads to an increase in costs for clients and usage of fake Aadhaar card by clients leads to financial losses for MFIs,” Satish said.
In its letter, Sa-Dhan has highlighted that lack of e-KYC can give rise to fraudulent activities and availing of multiple loans by fraudsters. Sa-Dhan has requested for invoking Section 11A of Prevention of Money Laundering Act that empowers the union government to permit non-banks to perform authentication under the Aadhaar Act.
“e-KYC is very critical for the Microfinance sector in dealing with KYC based frauds which could adversely affect clients and MFIs. Though RBI has enabled the use of video-based KYC facility, in the present context of COVID, it will be difficult for institutions for investing further in new technology and adopting it in scale,” Satish said.
The RBI has been giving lot of emphasise for automation in banking operations. On Monday, the RBI had asked banks to upgrade their systems to make NPA classification and provisioning fully automated. The regulator asked banks to avoid manual intervention or over-ride the asset classification process.
Microlenders faced difficulties in collection process after Covid-19 lockdown came to effect in March. However, of late, the scenario has improved with some MFIs reporting near-normal collection rates, Satish said.