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The importance of Digital Signature in NBFC-MFI Sector

Anirudh Singh G. Thakur, Head – Legal, Compliance & Company Secretary, Arohan Financial Services Limited

We are aware that financial inclusion is one of the key national priorities, with its objective of allowing the last mile borrower to get access to formal credit and get loans based on his/her clean credit history. One sector leading this, in addition to all the financial institutions, is clearly the NBFC-MFI (Micro Finance Institution). This is because of the outreach and geographies in which the sector operates viz. remote and rural areas, where financial inclusion is needed the most!
MFI is one business where human to human interaction is heavy, as it is based on the traditional Grameen Model of the field officer visiting the customer at her door-step than the other way round and the loan being disbursed in a Joint Liability Group (JLG) Model. Credit is made available to the customer basis her need, the credit record and the EMI amount vis-à-vis her income in the JLG, to ensure social guarantee. Against this background, the documentation and identification of the borrower holds utmost criticality. Therefore, transition into a Digital Documents and Digital Signature process module holds the most relevance and significance for the NBFC-MFI sector.

The Overhaul
Now with so many agencies, including the National e-Governance Services Limited (NeSL), entering this arena, the future is set to overhaul this sector, for various reasons as listed below:
1. The identification of the borrower is absolute and without any room for doubt in the minds of the lender, to ascertain that the applicant is the same as the person signing the documents. Impersonation will be a thing of the past.
2. But for this Aadhaar-based Digital Signature, officials of NBFC-MFIs will have to spend long hours, put more efforts and money just to get the documentation and wet signature done.
3. The use of Aadhaar-based Digital Signature will not only result in faster turnaround time with minimum efforts, but also usher in the era of transparency, accuracy and cost optimizations.
4. Transparency will reduce the ghost loans which is also an issue faced in the sector; ensure fair treatment of the customers who may not be empowered enough as they are in need of credit;

and help build clean and authentic documentation. Tampering of documents by any of the involved parties will be nearly impossible, as any change in the digitally signed documents is not possible.
5. As far as legal acceptance of the documents in the court of law is concerned, the issue has been taken care of by the Digital Signature provider, with the issuance of a certificate under the Information Technology Act and Indian Evidence Act, which is valid in the court of law.

Transparency will reduce the ghost loans which is also an issue faced in the sector

6. Today, due to efforts and time involved, the delivery of a copy of agreement to the customer is not successful in most of the cases. This will be eliminated with Digital Documents and Digital Signature, as sending documents to customers will be as simple as a click of a button on a computer.
7. In terms of cost saving, there will be no requirement of papers, printing cost, courier cost, scanning cost, physical documents storage cost etc. Even by a conservative estimate, the total time and cost involved in the Digital Documents and Digital Signature is reduced to 90 percent vis-à-vis physical documents.
8. It will be the stepping stone towards ‘green documentations’ helping companies achieve a carbon neutral status.
9. And to top it all, this system is in compliance with the Hon’ble Supreme Court’s Order on Aadhaar Act.

However, there are some challenges, which although resolvable, remain as of now. Firstly, not all NBFC-MFI customers have their mobile numbers linked to their Aadhaar number to receive OTPs, which is a necessity for Aadhaar-based Digital Signatures. However, as a solution by some providers, companies are allowed to attach the biometric device to their mobile/tab/computer to do away with the requirements of the OTP. Secondly, in some states, the penetration of Aadhaar is very low, which may pose a challenge to the use of Digital Signature. However, it may be overcome by asking such customers to apply for Aadhaar in the nearest Aadhaar centre. Lastly, some of the negotiable instruments viz. DPN (Demand Promissory Note), are still required to be signed in wet signature. As per the IT Act, Digital Signatures are not allowed on these negotiable instruments. The Government, with appropriate amendments in the requisite law, can help here.

Even with these few challenges, the benefits far outweigh the issues involved. Digital document and Digital Signature agencies including NeSL should definitely discuss this matter with the Government and come out with a more acceptable cost structure, especially for the MFI sector. This is due to the fact that as per the guidelines issued by the Reserve Bank of India, NBFC-MFI is a margin cap business, hence any further cost on this sector will prevent in kick-starting a potential journey which provides transparent, non-tamperable, cost effective, and the most compliant solution for the sector with benefits from this transformation the most, which barring demonetization and the current pandemic situation has demonstrated a repayment track record of more than 99 percent. You can yourself compare it with the corporate loan repayment track record, available in the public domain to know the difference between the MFI loan repayment and corporate loan repayment!
It is certain that this transformation holds the future of effective customer-onboarding for the sector that contributes an active share to the key national priority of financial inclusion.

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