Aadhaar Gaining More Teeth, To Play Key Role In ‘Banking For All’

Controversy is still raging over the mandatory use of Aadhaar, but an expert committee on financial inclusion has already recommended that the Reserve Bank of India should leverage the Aadhaar network to ensure that every Indian has a free bank account by January 2016. The recommendation has come from the Committee on Comprehensive Financial Services for Small Business and Low-Income Households, which is headed by Nachiket Mor, an RBI board member and former ICICI Bank executive.

RBI set up the committee last September and it has now sought comments from the public on the draft recommendations on or before January 24, 2014. Other key members of the panel include former Citigroup CEO Vikram Pandit and Axis Bank CMD Shikha Sharma.

According to the report, every Indian resident over 18 years of age should be automatically issued a “universal electronic bank account at the time of receiving his/her Aadhaar number.” One can choose his/her preferred bank from the empanelled ones and need not pay any fee for opening an account. However, the bank can levy transaction charges, the committee says. It also recommends setting up of a ‘unified’ redressal agency under the finance ministry to deal with customer complaints.

About 90% of small businesses have no links to a financial institution and 60% of Indians do not have bank accounts, the report states. “Aadhaar is the key piece of infrastructure to enable a customer to be identified and authenticated so that repudiation and fraud risks are minimised and therefore, should become the universal basis for authentication,” it adds.

The panel has also suggested that a special type of banks should be introduced to provide payment services and deposit products to small businesses and low-income households. Such banks could be categorised as payments banks and “they will be restricted to holding a maximum balance of Rs 50,000 per customer,” the report says. Even existing lenders can set up these payments banks as subsidiaries. The report also recommends setting up another category of wholesale banks that will provide funds to other banks and financial institutions that directly lend to low-income households.

On the face of it, the recommendations to introduce a multi-layered banking system make sound sense as these ‘proposed’ entities will be serving the financially weak segment of the country and overall, the inclusion plan for 2013-2016 looks good.

Except for the Aadhaar part.

But before we go ahead, let us have a look at Aadhaar and what all it offers. Launched by the Unique Identification Authority of India (UIDAI), the Aadhaar scheme was initially introduced to ‘promote inclusion and benefits of the marginalised sections of the society that has no formal identity proof.’ Even today, Aadhaar-enabled services are essentially linked to various government welfare schemes – so that its beneficiaries can access the same in a hassle-free manner.

However, the ‘banking for all’ initiative in its ‘suggested’ format cannot be a marginalised movement, aimed to serve only the under-banked/unbanked regions or the weaker section or those below the poverty line. It has to have a unified structure across the country – involving every Indian citizen. In other words, it will be much like the ‘voter card’ mechanism we have in place right now. At the age of 18, an Indian is entitled to get a voter card irrespective of the financial divides. Going forward, if the central bank intends to follow the same principle and wants to bring the entire population of the country under its inclusion umbrella (after all, one cannot leave one section of the citizens out of a mass initiative just because they are financially more stable), opening an account at the stipulated age should become mandatory and that means a mandatory Aadhaar validation.

And that brings us back to the basic question – what is the legal status of Aadhaar in India? Is it just a financial inclusion tool for the economically weak or do the government agencies intend to turn it into an ‘all-inclusive’ tool required for every social and economic activity – right from marriage registration to land registration, from banking to shopping and more?

The RBI has already asked banks to ensure Aadhaar authentication for card transactions at merchant locations. “All new card present infrastructure has to be enabled for both EMV chip and PIN and Aadhaar (biometric validation) acceptance,” the central bank stated in a notification on November 26 last year.

Although the Supreme Court has ruled that the Aadhaar Card is not mandatory to get government benefits and services, and the National Identity Authority of India Bill is yet to get Parliamentary nod, Aadhaar seems to be enjoying a more hallowed status and getting its teeth deep into every key financial transaction one can think of. That might not be quite desirable at this stage as divulging biometric data (required for Aadhaar Card) is still considered voluntary and secure storage of the same cannot be guaranteed even now.

The rest of the recommendations by the committee dwell on the structure and requirements of the proposed banks, priority sector lending and deposits, and classification of non-banking financial companies (NBFCs).

Interestingly, the payment banks will be required to meet the standard CRR terms and must also deposit the balance proceeds in approved SLR securities with duration of no more than three months. As they won’t be permitted to assume any kind of credit risk, which literally rules out any risk of default, the minimum entry capital for them will be Rs 50 crore instead of the Rs 500 crore required for full-service commercial banks in the country. Also, the wholesale banks cannot accept deposits bigger than Rs 5 crore from a single depositor.

The RBI had launched a three-year financial inclusion programme in April 2010, which prompted banks to open outlets in 200,000 villages. The current recommendations seek to deepen such access and experts even feel that the new banking licences, to be announced soon, can be categorised accordingly. But both the government and the RBI should ensure that the programme becomes ‘inclusive’ in the true sense of the term and validation issues should not throw a spanner in the works.