Aadhaar-less future grounds NBFCs’ paperless instant loans

Instant paperless loans, offered by non-banking financial companies (NBFCs), are losing the race against time. This has happened after the Supreme Court (SC)’s order restrained entities from using Aadhaar data by striking down Section 57 of the Aadhaar Act.

Paperless instant cash loans let anybody obtain instant cash loan in a few minutes anytime, anywhere with minimal documentation since it used the eKYC (know your customer) route via Aadhaar.

Now, Aadhaar data can’t be used and this has put a spanner in the works of those giving out paperless instant loans. NBFC Home Credit India has for the time being shelved its paperless online cash loan product. Many others that were offering credit on very small ticket sizes are deliberating the next move, given that swinging back to physical verification entails at least a 100% increase in cost.

Instant loans thrived on account of Aadhaar eKYC. But, without Aadhaar data use, the loans become risky. The usage of Aadhaar for personal verification had earlier virtually eliminated the fraud risk, which could now rise.

“We respect the recent Supreme Court verdict and have discontinued the e KYC verification process. However, NBFCs like us had a large dependence on eKYC verification process especially for first-time borrowers and subsequent to the ruling we are looking for solutions to provide our customers easy and quick loans aiding the Financial inclusion and digitalisation agenda of the country. Our paperless online cash loan service has been put on hold right now and we are in the process of revising our communication on the website,” said Home Credit India. 

Its paperless cash loan service was for amounts starting from Rs 25,000 to Rs 50,000.

Physical verification was the process followed before eKYC was introduced, however, it was a time-consuming and expensive process for both the companies the customers. 

“Leveraging Aadhar for loan seekers had been a great step forward in digitisation of financial services in the country and we hope that the government may come up with an alternative process for online verification to support the Digital India campaign,” Home Credit India said.   

The inability to use Aadhaar for authentication will impact the new-age NBFCs and fintechs disproportionately, as one of their core competencies was a quick turnaround. 

An increase in volumes is a necessity to drive operating leverage benefits for small ticket consumer loan companies, which may be impacted due to the slowdown in portfolio expansion.

“The turnaround time for disbursing loans is likely to increase for few quarters until the lenders re-align their verification processes. Companies which were able to cover a larger geographical area while sourcing and processing cases only on the digital platform may have to convert to conventional models for physical verifications, including an increase in paperwork, human intervention and setting up verification networks. In addition, companies may have to grapple with requests from existing customers for delinking of their Aadhaar data. A typical eKYC verification cost could be below Rs 50, which could increase multifold,” said India Ratings and Research Pvt Ltd. 

Experts say that for those handling large volumes eKYC verification cost was as low as Rs 15-16 and now with physical verification, this would go near Rs 100, easily a 5-6 fold increase.

Aadhaar card can, of course, be substituted by a combination of other identity proof and address proof such as permanent account number (PAN) and voter cards, issued by government agencies. Electronic verification of PAN card could allow lenders to mitigate fraud, which though is less superior to eKYC but can be somewhat sufficient as per consumer financiers’ anti-fraud rience. As per some reports, PAN card penetration is less than 30% as compared with over 90% penetration of Aadhaar. So, PAN is no panacea for the lack of Aadhaar data.

Some fintechs, who earlier claimed they were giving instant loans, are now silently dropping the ‘instant’ from loans. Any loan that takes more than 3-4 hours is not instant by any yardstick. Some firms are giving instant loans only to existing customers, whose data is already in the repository.