For retail lenders with credit verification processes built around technology, the order would raise operating cost, turnaround time in loan disbursement as well as fraud risk
The Supreme Court’s order restraining entities from using Aadhaar data by striking down Section 57 of the Aadhaar Act is likely to hamper balance sheet growth of consumer finance companies in the short-term. On a long-term basis, especially for retail lenders who have credit verification processes built around technology, the order would increase operating cost, turnaround time in loan disbursement as well as fraud risk.
Impact on portfolio growth
Consumer durable financing, especially for small-ticket purchases, has been expanding at a rapid pace (around 45% annually over last two years). Over the past few years several fintech non-banking financial companies (NBFCs) have emerged, who have built a part of their books on small-ticket (personal as well as business) loans. Replacing Aadhaar with the traditional methods of verification will slowdown customer acquisition in existing geographies and reduce the pace of geographical expansion, thereby impacting fresh disbursements which would impact portfolio growth and credit penetration. The inability to use Aadhaar for authentication will impact the newer age NBFCs and fintechs disproportionately, as one of their core competencies was a quick turnaround.
Operating cost to rise significantly
The turnaround time for disbursing loans is likely to increase for a 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 digital platform may have to convert to conventional models for physical verifications, including increase in paper work, 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. This can significantly impact operating costs and players could probably need to revisit strategy on small-ticket and/or shorter tenor loans in terms of products and customer acquisition.
Impersonation risk may increase
The usage of Aadhaar for personal verification had earlier virtually eliminated fraud risk, which could again rise. However, firms which could efficiently deploy the robust conventional credit underwriting framework towards eliminating the frauds may mitigate this risk. Further, Aadhaar card can be substituted by a combination of other identity proof and address proof such as 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 experience.
Impact on micro-finance
Micro-finance borrowers and lenders were among the biggest beneficiaries of Aadhaar-led identity verification. For disbursements, MFIs would now need to either disburse in cash or first verify bank accounts before making direct bank disbursements, thereby increasing operational costs and risks. In pre-Aadhaar days, lenders would use ration card, voter card, etc., as identity proof; these records are with the credit bureaus at least until FY17. However, fraud risk would rise. Again, buyers of microfinance portfolio from MFIs would probably select pools where second or third cycle borrowers have a dominant share in the pool to avoid the fraud risk with newly on-boarded borrowers.
-Edited extracts for India Ratings report