Sahil Arora

India has lost its tag of being the fastest growing economy in the world as official data showed the economy growing at 5 percent for April-June, a six-year low.

With a $5 trillion economy as its goal, the government has gone into a reform spree. While the reforms, including FDI policy liberalisation, are indeed laudable, economists have argued that to spur growth, the government must address the liquidity crunch in the market. The problem has been partly caused by the non-banking and banking sector crisis and also due to the country being light years away from achieving true financial inclusion.

Financial inclusion, analysts argue, is the driving force for economic growth as the financial sector not only helps in accessing capital but also encourages innovation and investment, which in turn impacts growth.

India is home to the second-largest unbanked population in the world and only about 8 percent of its population has access to formal credit. It is high time the government and the Reserve Bank of India (RBI) (the regulator for payments system) acknowledged the role of the fintech sector in achieving financial inclusion.

The fintech sector not only offers ease of credit solutions, but also technology that allows customers to connect to financial institutions. However, its ability to reach the unbanked has been severely hampered ever since the Supreme Court struck down the ability of private companies to use Aadhaar as a means of KYC, which allowed fintech providers to undertake KYC without having to physically interact with customers, a move that has led to virtual wallets almost breathing their last.

The only available option for these players is to onboard customers by reaching their doorstep to collect documents and complete formalities, which apart from being back-breakingly expensive, is incredibly onerous.

While the government has recently attempted at digitising KYC, against the backdrop of industry demands for video-based verification, the article discusses how the move has fallen well short of industry expectations. It’s not only an attempted liberalisation gone horribly wrong, but also a case of the government effectively changing the goal post.

Govt taking a shot at digitising KYC

In what was initially perceived as a landmark move, a few weeks ago, the government amended the relevant rules under the Prevention of Money Laundering Act, 2002 (PMLA) to introduce two features.

First is the case of ‘digital KYC’ where the government allowed the process to be conducted by capturing a live photo of the customer and his/her officially valid document (or ID card), along with information such as latitude and longitude of the location where the live photo is taken.

Second one is about the feature of ‘equivalent e-document’ of the ID card, where instead of the card, the electronic equivalent could be accepted for KYC and onboarding purposes. However, as they say, the devil lies in the detail.

Digital KYC

The fintech players have long demanded that KYC be allowed to be undertaken in a non face-to-face manner such that customers can be onboarded from the ease and comfort of their homes, and thereafter, provided a slew of payment and credit options.

In the government’s version of digital KYC, regulated entities (i.e. financial institutions, wallet providers etc) have been mandated to ensure their authorised officer physically visits the customer or vice versa, undertake the process through the regulated entities’ mobile application.

This would have a series of steps -- including clicking a live picture of the customer as well as his/her ID documents, requirement to time and location stamp the pictures and undertaking OTP verification of information entered by the customer through a message to the customer’s mobile number. Even after that, it requires physical signatures to confirm details on the printed application form.

With this move, the government, contrary to industry expectations, has reinforced the need for KYC to be done in the physical presence of the officials and in fact, further regulated their interaction. This has all but killed the ‘attempted digitisation’ and with it, hopes of the fintech sector.

Equivalent e-documents

With digital KYC being a no-go, all hopes were pinned on the government’s move to allow ‘equivalent e-documents’ for KYC verification. But that too, fell woefully short. The government, in approving equivalent e-documents for KYC, only allowed such electronic documents issued by the ID card issuer, and that too with digital signatures.

The demand of fintech players to allow scanned copy of ID card documents for KYC, which could be uploaded on mobile application to facilitate non face-to-face KYC, has not been accepted.

Given superior technology to detect tampering and fraud, now more than ever, the government’s reluctance to acknowledge technology as a means to achieve financial inclusion is puzzling.

The curious case of CKYCR

The Central KYC Registry (CKYCR) came into being with much fanfare in 2015. There was hope that once all KYC records of customers are stored in a centralised registry, there would be no requirement to re-submit KYC documents and information.

For completion, regulated entities would only be required to obtain from the customer his/her KYC identifier -- which was allotted at the time of uploading information on the CKYCR -- and some basic data. This would serve as a basis for the details that could be downloaded.

However, despite the laudable regulatory intent, the CKYCR is yet to take off even after 4 years, for multiple reasons.

First, the regulations failed to clarify the manner in which information would be continually updated, whether it would be enough for regulated entities to just obtain a confirmation from the customer that the information stored in the registry is accurate or whether it is to obtain ID documents to ensure accuracy.

Second, there is limited customer information in the registry on account of costs associated with uploading of information on the CKYCR. With this, another attempt at a simplified KYC process has fallen short of expectations.

Not Too Late?

Recently, the steering committee on fintech-related issues constituted by the Ministry of Finance released its report in which it noted the urgent need to reduce the costs of KYC to promote financial inclusion among weaker sections.

The committee specifically recommended new modes of KYC, including a video-based process, e-sign and non face-to-face onboarding, and also proposed for CKYCR to be made fully operational with no charges of uploading the data.

With the panel having released its report barely a couple of weeks after the PMLA amendment, the recommendation could be seen as nothing short of a stinging indictment of the government’s Digital KYC process.

Former US president Ronald Reagan had summarised government's view on regulation like this: “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise.”

Let us hope that the need to subsidise does not arise here, and effective regulation, taking into consideration the times we live in, and the needs of the country, allows the fintech sector to flourish, and financial inclusion to be achieved. Because in financial inclusion is a crucial piece of the government’s $5 trillion economy puzzle.