Why the govt needs to remove barriers to paperless banking, e-KYC

The Ministry of Finance and the Reserve Bank of India have taken several steps in recent weeks to turn the economy around. Successive interest rate cuts, linking bank interest rates to the repo rate, the merger of public sector banks aimed at improving efficiencies, and better management of loan disbursals and stressed assets are some salient achievements. Many of these measures are also aimed to revive the banking and NBFC sector which is going through a trying phase.

Finance Minister Nirmala Sitharaman also made the decision to allow NBFCs to authenticate loan accounts via Aadhaar-authenticated bank accounts. E-KYC is central to digitisation. Through the various techniques of e-KYC such as Aadhaar OTP verification, deposit and loan accounts can be opened in minimal time, thus saving costs at the bank’s end and saving time for the customer.

While the recent steps taken by the government are appreciable, the RBI and the government can address two critical requirements to fast-track financial inclusion and access to financial products for every Indian.

KYC (Know Your Customer) regulations dictate a large part of the customer onboarding process for all banks. The prospective customer must share details about his identity, address, qualification, etc. for his account to be activated. As per a recent report from Signicat, an electronic identity services provider, four in 10 consumers abandoned their bank account application, and around 39 percent of these abandonments were due to the lengthiness of the application.

From the regulatory standpoint, getting customer onboarding right is critical as it’s the riskiest period in the bank-customer relationship. At the same time, it’s also necessary to make the onboarding frictionless, real-time and digital. With the spread of digital commerce, there arises the need for technological solutions to the problem of identity verification and how to create trust.

In technological terms, the most interesting possibilities to streamline KYC processes revolve around video KYC. With many newer smartphones having high-specification cameras, the ability to verify that someone is who he says he is – without having to meet him face-to-face – is greater than ever before. A camera phone helps not just to scan and upload documents but also maintain an audit trail of the customer on-boarding process with the bank. Video KYC onboarding can include liveness checks such as reading out a unique code to ascertain he’s a live person and providing clear consent.

As per media reports in July, the RBI was expected to roll out video KYC guidelines shortly and this will be a tremendous boost to the financial services industry in driving access to finance. Keeping with the government’s vision of digitization of payments, a frictionless account opening process is a must—and video KYC is one of the available technologies today that will help us get there.

In 2016, days after the demonetisation, the RBI had made the welcome announcement of allowing e-KYC for the opening of limited functionality savings accounts as well as borrowal accounts. The borrowing through such accounts opened paperlessly and instantly was capped at Rs 60,000. This was a good initiative from the RBI to test the waters for paperless loans. However, time has passed and the caps on these accounts need to be raised. Today, the average ticket size of a personal loan purchased digitally is close to Rs 3 lakh, and the demand for such loans is not just from metros but from non-metros as well. Therefore, it is time the RBI revisited this cap. Secondly, credit card account openings are excluded from e-KYC. We have seen a consumer preference for paperless account openings even for credit cards. Therefore, credit card onboardings too need to be brought under the e-KYC guidelines.

These suggested changes are simple and do not require further amendments of any Act. These changes are vital for banks, financial institutions, NBFCs, and PPIs to increase their reach without compromising on the sanctity of the customer verification process or the spirit of the KYC programme. While the going’s tough for the BFSI, the government’s steps to recapitalise banks, improve policy rate transmissions and making loans more easily available are commendable and will turbocharge the economy.