SC notice on Aadhaar: the slowdown in customer acquisition by consumer credit companies

The Supreme Court ruling prohibiting entities from using Aadhaar data by rescinding Article 57 of the Aadhaar Law is likely to hinder the growth of balance sheet consumer credit companies in the short term. In the long run, especially for retail lenders who have technology-based credit verification processes, the order would increase operating costs, loan disbursement delays, and the risk of fraud.

Impact on Portfolio Growth
Sustainable Consumption Financing, especially for small purchases, has expanded rapidly (about 45% per year over the past two years). In recent years, several fintech non-bank financial corporations (FNFCs) have emerged, building part of their books on low-cost loans (personal and commercial). Replacing Aadhaar with traditional verification methods will slow down the acquisition of clients in existing geographic areas and reduce the pace of geographic expansion, which will impact new disbursements, which would affect the portfolio growth and credit penetration. The inability to use Aadhaar for authentication will have a disproportionate impact on NBFCs and newer fintechs, with one of their core skills being a quick turnaround.

Operating costs will increase significantly
The repayment period for loans granted will likely increase. a few quarters until lenders realign their audit process. Businesses that can cover a wider geographic area while searching and processing files on a digital platform alone may be forced to convert to traditional physical verification models, including increasing paperwork, human intervention, and established verification networks.

Companies may be faced with requests from existing customers for the disbadociation of their Aadhaar data. A typical eKYC verification cost could be less than 50 Rs, which could be multiplied by several. This can have a significant impact on operating costs and players could probably need to review their strategy regarding low cost and / or short term loans in terms of product acquisition and pricing. acquisition of customers.

The risk of identity theft may increase
The use of Aadhaar for personal verification purposes previously virtually eliminated the risk of fraud, which could further increase. However, companies that could effectively deploy the strong conventional credit underwriting framework to eliminate fraud can mitigate this risk. In addition, the Aadhaar card can be replaced by a combination of other proofs of identity and address, such as PAN cards and voter cards, issued by government agencies. The electronic verification of the PAN card could allow lenders to mitigate fraud, although it is less superior to eKYC but is somewhat sufficient given the anti-fraud experience of financial consumers.

Impact on Microfinance
Micro-finance borrowers and lenders were among the main beneficiaries of Aadhaar's identity verification. With regard to disbursements, MFIs should now either disburse money or first check bank accounts before making direct bank disbursements, which would increase operational costs and risks. . Prior to Aadhaar, lenders used a ration card, an elector card, etc., as proof of identity; these documents are in the possession of credit bureaus at least until fiscal year 17. However, the risk of fraud would increase. Once again, microfinance portfolio buyers from MFIs would likely choose pools where senior borrowers hold a dominant share to avoid the risk of new borrower fraud.

– Excerpts from India Ratings