Ever since it was launched, the unique identification project, commonly known as Aadhaar, has been under constant legal and civil scrutiny about its validity and scope of use.
The government so far had been trying to push the use of Aadhar by making it mandatory for availing various social welfare benefits like Direct Benefit Transfers. Now, however, private companies seem to be doing the same by using Aadhaar as their primary identification requirement for customers trying to avail their services.
The latest entrant in the fray is the Indian microfinance industry which has made Aadhaar mandatory for more than 3.5 crore borrowers. Microfinance lending offers small loans to the low income population in the country. The loan size is usually less than Rs 1 lakh for a borrower and the interest rate ranges from 15%-30% per annum.
Last year, loans provided by the microfinance institutions grew a whopping 89% but without a commensurate increase in the number of clients, implying an increase in the average loan size or multiple loans being given to the same person.
To tackle this problem the two self-regulating microfinance organisations – Microfinance Institution Network and Sa-Dhan – have enforced the requirement of Aadhaar as a prerequisite to avail loans arguing that it will help the lenders prevent borrowing multiple times to the same person.
For instance, the Microfinance Institutions Network issued a board directive in October last year, asking all of its 53 partner and 23 associate lenders to collect Aadhaar numbers of all their customers by July 1 this year. While its associates have been able to achieve more than 80% Aadhaar number seedings in the central database, the organisation insists that it is necessary for customers to provide Aadhaar as a proof of identity to prevent over-indebtedness.
Ratna Viswanathan, Chief Executive Officer, Microfinance Institutions Network explained the rationale behind the move. “It was recognised that allowing a long list of alternative documents was leading to individual manipulating multiple identities as demographic data differs in different Know Your Customer documents,” she said, while explaining the need to make Aadhaar mandatory. “This resulted in a situation where Credit Information Report extracted for an ‘individual’ with a particular set of KYC did not capture all records pertaining to this ‘individual’,” she added.
What Viswanathan says has also been recognised and implemented by the other self regulatory organisation Sa-Dhan as well, which has reportedly been working with the Unique Identification Authority of India and its partner MFIs to organise camps and get its borrowers enrolled in the Aadhaar system.
The Microfinance Institution Network is doing the same thing by pushing its partner institutions to help people get Aadhaar numbers made if they want to avail loans but insists that requirement of Aadhaar is not exactly mandatory.
“There is no denial of loan but MFIs help on board clients and help them get Aadhaar which is then seeded,” said Viswanathan. “However, there are certain areas such as Assam where Aadhaar penetration is very low and hence they are treated as an exception,” she added.
While the Supreme Court is still hearing and deliberating on multiple cases related to the use of Aadhaar including its legality of use for purposes other than identity verification, MFIs are using the number to establish creditworthiness of its borrowers by comparing their financial profiles using databases of credit bureaus.
“Each client’s information is uploaded to all credit bureaus and in case a loan is required, the client’s particulars are checked to ensure that the person does not have more than two MFI loans at a time by drawing a Credit Information Report from at least one of the [credit] bureaus,” Viswanathan said.
Sketchy records
As the MFIN continues to push for Aadhaar seeding through its partner organisations, microfinance institutions on the ground are not yet giving up on other identification proofs to establish a person’s credit record because they claim that data from the credit bureau might be sketchy.
Amit Kumar, Deputy Manager of Delhi-based Fusion Microfinance which has a loan book of more than Rs 800 crore spread across five lakh clients, explained the main problem. “If you see a customer’s credit information through a credit bureau on the basis of Aadhaar card, it will be misleading because there will be a mismatch [when compared to the same information gathered through other identities],” he said.
Kumar explained how his organisation has been insisting on an identity proof in addition to the Aadhaar number – preferably a voter’s identity card – to check on a borrower’s credit history.
While Kumar’s explanation that some loans taken in the past on the basis of other identity proofs could escape Aadhaar based verification stands for as long as the loans aren’t completed. The short borrowing period of one or two years in microfinance lending implies that at some point, the transition to Aadhaar as the primary source of credit information is on the cards.
“The way forward is that we want to credit amount to the person’s bank account directly which is likely to be a Jan Dhan account already linked with their Aadhaar card,” he added.
As the industry transitions to the new era where Aadhaar will be an important, if not technically mandatory, requirement to avail credit, customers are bound to face hurdles if their Aadhar numbers are not in place.
Another scenario here could be someone else in the family of the primary borrower using their Aadhaar number to avail another loan which won't be in contravention of the MFI's rule of not lending more than two loans at the same time to a client but could end up increasing the debt-burden on the household.
For now, however, the industry is not collecting data of any family member of the prime borrower, Viswanathan clarified.
Legally permitted?
But it is still unclear if all of this is legally permitted in any manner. There are concerns about the legality of microfinance institutions insistence on Aadhaar numbers to give loans and pushing people who don’t have them to get them made just so that they can use it to verify their creditworthiness and etch out a picture of their financials using data they share with credit bureaus
Legal researcher Usha Ramanathan said the Aadhaar (Targeted Delivery of Financial and other Subsidies, Benefits and Services) Act, 2016 doesn’t allow making the number mandatory for any service including the electronic know-your-customer verification which MFIN insists it has been doing.
“The 2016 Act does not permit `seeding’ of numbers in any database. Even eKYC, which may be seen as being allowed by section 8(3) can only be by specific consent. And it certainly cannot be made a condition for providing the service,” Ramanathan said adding that expansion of use of Aadhaar beyond those specified in the Act is in violation of the Supreme Court order from October, 2015 and even that has to be voluntary not mandatory.
MFIs, Viswanathan said, upload their lending and repayment data on a central database every fortnight and now this includes Aadhaar numbers of their customers – something that raises privacy concerns about how these numbers are being securely stored or prevented from being misused.
“The law is itself clearly about authentication, and not about making the data base available for all manner of uses,” lawyer Ramanathan said.
Meanwhile, there are concerns that Aadhaar data shared with multiple agencies could be used for unintended or unknown purposes. MS Sriram, a professor at Indian Institute of Management in Bangalore said that there is a possibility that private entities might start slicing and dicing individual-level Aadhaar data.
"Will it be used for purposes other than what has been reported? Of course it will be used. If there is revenue, the credit information companies will sell anything," Sriram said. "As of now they are selling data at consolidated level, we have still not stooped down to selling individual data, but if there is no protection, the companies will either sell it, or mine it."
MFIN didn't respond to Scroll's queries on the legal backing for its decision to seed Aadhaar numbers into the database and sharing it with credit bureaus when the Aadhaar Act doesn't allow it.