Why RBI’s small step towards eKYC is a giant leap for digitising finance

On December 8, the Reserve Bank of India (RBI) took a significant step in making paperless and cashless finance a reality. The central bank has now allowed the opening of deposit and borrower accounts through OTP eKYC.


On December 8, the Reserve Bank of India (RBI) took a significant step in making paperless and cashless finance a reality. The central bank has now allowed the opening of deposit and borrower accounts through OTP eKYC.

Is this a big deal? Does the aam aadmi stand to benefit from this? The answer to both questions: yes, in a big way.
This small step by the RBI is a giant leap towards digitising finance in India. It will help in no small way towards increasing financial inclusion and bringing in potentially hundreds of millions of unbanked Indians under the ambit of formal banking – all thanks to the power and reach of cellphones.

The traditional KYC process – authenticating documents by collecting printed proofs, processing them, and validating accounts – is more expensive and time-consuming. However, eKYC through OTP is instant and happens in real time, allowing people to open bank accounts in an instant, paperless, presence-less manner.
An Aadhaar-based OTP authentication system had been available for a while now. But it is only now that the RBI has decided to use the process to ease the opening of bank accounts, which would help millions of unbanked Indians who’ve been impacted by demonetisation.

This pilot project is expected to launch on January 1, and its success could broaden the scope for instant eKYC for many other financial products.



The Process

In an amendment to the master direction on KYC, the RBI said recently that customers can complete their KYC procedure through OTP. This allows them to open accounts without visiting a bank or submitting documentation manually.

The directive comes as one of the several that the RBI has issued along with the Central government to ease the movement of money following the demonetisation of Rs. 500 and 1000 notes.

According to the amendment, some conditions need to be met for OPT-based eKYC. They are as follows:

1. Newly-opened accounts can hold up to an aggregate of Rs. 1 lakh at a time.

2. The total credit in a financial year in an account should not exceed Rs. 2 lakh.

3. Term loans can be sanctioned for accounts opened through eKYC, and the aggregate amount cannot exceed Rs. 60,000 in a financial year.

4. Both deposit and borrower accounts opened through e-KYC will have to be converted into a regular account within one year. The banks have to complete due diligence on these customers within this period and complete the formal KYC process, failing which the accounts will be closed with immediate effect. No further debits will be allowed to the borrowers account.

5. Customers cannot hold more than one such account at a time with the same bank or any other bank. The KYC information uploaded by the banks on the Central KYC Records should clearly indicate the account that has been opened through eKYC, implying for other banks to avoid opening any account using the same procedure.

Why Is This Important?

Well-known economist and columnist professor Vivek Dehejia recently wrote, “The movement of some or many of the unbanked into the formal financial sector and the movement of firms from the informal to the formal economy (or, equivalently, the process of “creative destruction” whereby new formal sector firms replace defunct informal sector firms) has a permanent and positive impact on the economy, even though the gains from taxing black money via the currency swap is putatively one time only.”

What Dehejia is getting at is that the pain of demonetisation and moving towards a cashless world is worth going through for its long-term benefits of the larger economy wherein more transactions are going to happen through formal channels rather than informal ones, thus leading to growth of the formal economy. And this is possible by bringing more Indians under the scope of formal banking.
The former RBI governor Raghuram Rajan said that India had 21% of the world’s unbanked as of 2015. India’s banked population stood at around 400 million in 2014. Since then, 257 million Jan Dhan Yojna have been created.

Even if we assume that a total of 700 million Indians now practice some form of banking, be it through a bank, financial institution, or a mobile payment system, this number is still at least 300 million short of the number of mobile users which is over one billion strong in 2016.

If we exclude minors from this number of 300 million, it’s still a very large number of people who can now open bank accounts through eKYC. There’s an additional 250 million Indians who are yet to have a cellphone number or Aadhar but who eventually will come under the ambit of this scheme.



Benefits

From a broader economic perspective, let’s look at the benefits of the OTP-based KYC process.

Requires less time: This is going to quicken the process of opening an account, as it only requires interaction between a customer and his cellphone.

More secure: If Aadhaar-based eKYC is employed, it will ensure higher security as an applicant’s data can only be accessed with the customer’s consent and analysed instantly. Aadhaar, as it is biometrically de-duplicated, provides a higher level of security compared to other forms of identification. It will reduce incidences of identity theft, forging signature and submission of fake documents.

No paperwork: This process relieves you off standing in a queue before a bank counter or the hassle of paperwork. Unlike in regular borrower account openings, where risk assessment is carried out on the basis of a customer’s monthly paycheck and credit history, accounts through eKYC are opened based on parameters such as the customer’s social/financial status and location. However, no address proof is required. The process is carried out within minutes.

Cost effective: The electronic platform helps banks to reduce operating cost on processing paperwork, allowing multiple transactions to take place simultaneously. The reduction in costs is 2-3% in the case of banking products, and 20-30% in case of insurance products. Ultimately the customers stand to gain from the reduced cost of customer acquisition.

With a billion people using Aadhaar and the entire economy embracing cashless alternatives, paperless financial transactions are increasingly picking pace. An OTP-based account opening will enable people to bank with more ease and less risk, helping them find products that suit their financial needs.