Shining the light on mis-selling in Indian banking
By Bindu Ananth & Beni Chugh, Dvara Research
While the Supreme Court examines the constitutional validity of Aadhaar, we reflect on Aadhaar’s early promise of enabling easier access to bank accounts and payments, particularly welfare entitlements. Elsewhere we write about Aadhaar’s potential for financial inclusion and note the progress made in recent years. In this column, we look at the experience of the financial sector when using Aadhaar in various implementation processes and flag areas for improvement. We believe this kind of implementation surveillance is critical to realising the full potential of Aadhaar in a service delivery context.
First, it is our understanding that the Aadhaar project was designed for online authentication of biometrics and not for physical, Aadhaar card-based identification. The Aadhaar Act does not recognise the Aadhaar card, which was issued for convenience. Over time the card has been misinterpreted as an ID, much to the users’ detriment. Service providers often insist on consumers’ Aadhaar card as a pre-requisite for availing services despite it having the weaknesses of physical ID, particularly ease of falsification and susceptibility to making unauthorised copies.
Second, financial institutions often ask for Aadhaar along with another ID such as Voter ID. When demographic details on the two documents don’t match, the burden is on the customer to reconcile these differences. We recall a recent experience of a microfinance customer who was denied a loan because the date of birth on her Aadhaar card was different from that on her Voter ID. Though she got her Aadhaar updated in eight days, it was needless. This business process is useless to the financial institution and poses an unnecessary hardship on the consumers. Such practices need to be discontinued. Due to similar linkage issues, 16 out of 100 randomly surveyed pension beneficiaries were reported as not receiving pension entitlements in Ranchi, according to the EPW.
Third, the issue of proof of address has been an enduring challenge to financial inclusion in India. Recognising this challenge, the Reserve Bank of India amended its KYC Guidelines in 2016, to state that “a customer shall not be required to furnish separate proof of current address if it is different from the address recorded in the Officially Valid Document (OVD). In such cases, the Regulated Entity (RE) shall merely obtain a declaration from the customer indicating the address to which all correspondence will be made by the RE.”
This is specifically emphasised in the case of migrant workers and transferred employees who may not have proof of current address. Aadhaar being an OVD is subject to this guideline. However, customers continue to be denied accounts on this ground. Financial institutions need to monitor this violation of RBI guidelines without delay.
Instances of denial of services by banks should be reported to banking ombudsmen. During a recent field research, we met Sujata (not her real name) who hails from West Bengal and works in Gurgaon as a domestic help. She has been denied a bank account in Gurgaon because her Aadhaar card is linked to her address in Bengal, even though her employer is willing to certify her current address. Helpless, Sujata uses her brother’s bank account to transfer money to her son in Bengal. She understands the precariousness of this arrangement but to resolve this, she has to forego a week’s wages and travel to Bengal or obtain a new OVD for her address in Gurgaon. UIDAI’s provisions for updating an address online are often inaccessible to people such as Sujata.
These avoidable implementation challenges on account of Aadhaar can be significantly resolved by a clear legal articulation of permissible uses of Aadhaar through suitable amendments to Section 57 of the Aadhaar Act. It is also crucial that the RBI and other regulators address instances where providers cite Aadhaar to create self-styled, exclusionary practices.
This article first appeared in Hindustan Times.