Aadhaar has the potential to be integrated into the greater financial network of India, garnering the benefits of inexpensive credit that can only be achieved by people who have proven themselves to be creditworthy. But there’s still work to be done before this can be successful.
Aadhaar, A 12-digit unique identification number issued by the Unique Identification Authority of India (UIDAI), is getting serious. Since the first Aadhar was issued in 2010, the initiative has grown to include nearly 90 percent of Indians, including 99 percent of adults over eighteen years of age. Linked to demographic and biometric data as well a person’s financial institutions and accounts it has been heralded as the most sophisticated identification system on the planet. Though not without critics, namely people and organizations concerned about security and the possibility of big-brother-style government surveillance, the Aadhaar program has been championed by top World Bank chief economist Paul Romer, the United Nations, and the International Monetary Fund.
With Aadhar now almost ubiquitous, as MFIs we are now required by the RBI to transition to Aadhar as a sole form of identification.
What does this new system of identification mean for microfinance Institutions (MFI)?
Reducing enrollment time and cost of delivery
Aadhar has numerous potential benefits for microfinance. First, because it is already linked to demographic information and a bank account, it can make the enrollment and disbursal process a lot easier. The Reserve Bank of India requires all MFI to collect and present know-your-customers information which can sometimes be an arduous collection process, tying up resources and manpower in the field. With the introduction of Aadhaar, clients only need to provide this number. All of the other information necessary for know-your-customers regulatory requirements is already in their file. In addition to saving time, using Aadhaar will also eliminate data entry errors. It can also allow for easy disbursal of loans into the clients bank account. Potentially this can enhance field productivity and lower the cost of delivery.
Solving ID mismatch issues
We have historically accepted a range of ID types – driving licenses, voter identification, Job cards and family ration cards in order to ensure accessibility for the rural populations we serve. In the past, we have seen cases where people use different forms of identification to submit applications for loans to different MFIs. If the name recorded in this system differs, even slightly, from previous identification and records, which is often the case, sometimes these records never merge. This means our clients can potentially borrow in excess due to our incomplete knowledge of their credit history, putting both the client and the loan providers at significant financial risk. The implementation of Aadhaar as a sole form of identification will ultimately reduce multiple borrowing and ghost-borrowers. However the many possible transition obstacles need to be overcome before we can reap the benefits.
Sorting out names
Names in India are more fluid than in other parts of the world and matching the name on the old forms of ID to new ones is a challenge. Many people in India have a birthname that is different from their official name. It is also common to present a family name before an individual name, though this is not always the case. Some of our members, we found, change their name before marriage as their original name does not match their horoscope and refuse to acknowledge their ‘official’ names, although this is what their card says. Our naming system is embedded in a long history of regional tradition and cultural heritage, but it can also add confusion to identification. Names on Aadhar don’t always match the previously used forms of IDs.
Date of Birth
In rural India, the majority of adults over the age of 30 have no birth certificate and don’t know their exact birthdate. Consequently there is no choice but to take a person’s approximate estimate at face value. Since its not a true date, people often forget the date they chose and there have been cases where different IDs present birth dates with a difference of over 8-10 years.
Knowing a member’s address is crucial, particularly for a customer base without reliable phone numbers or phone connectivity. Aadhar does not work well as an address proof and is often wrong or misleading requiring additional capture of true address information in the field.
Forgery is also something we need to be vigilant about. Our credit team has already encountered forged Aadhar cards in the field. However, unlike other forms of ID, the authenticity of an Aadhar number can be easily checked at https://resident.uidai.gov.in/aadhaarverification.
Making it work
At the very heart of the matter, Aadhaar has the potential to help MFIs achieve their long-term goal of bringing cost effective finance, credit, and banking to the rural by making delivery easier and mitigating risk. Before this can happen however, we need to successfully navigate the challenges inherent in changing an entire nation’s system of identification. The industry as a whole needs to enable the transition in the credit bureaus by working diligently to authentically match old and new.