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Can paperless finance technology increase household income in India?

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The Reserve Bank of India (RBI) committee looking into household finance has several fascinating takeaways into what impedes Indian families from saving, insuring, and investing better. Headed by Tarun Ramadorai, professor of Financial Economics at Imperial College London, the committee report says households can significantly augment their annual income if they had access to formal financial institutions and products, and that technology has a key role to play in ensuring this access.

A good money management plan can help augment a household’s income. The household finance report determines this augmentation to be 10 percent. Interestingly, this increase isn’t due to external stimuli such as a salary raise or a tax cut, but from better access to financial products at all income levels.

Indian households have traditionally locked up money in gold and real estate. But through simple planning of their investments, households can invest for higher returns with no increase in risk.

For example, instead of gold, which has been volatile, they can put money in a savings account and earn 3.5-4 percent per annum. This translates into an augmentation of about four percent in household income, as per the report.

A slightly more nuanced investor may say that she can achieve a higher rate of return with a liquid mutual fund (past returns have been 7-8 percent). Adding a health insurance to its portfolio, a household can better protect its savings and investments from health-related emergencies. The report says a household can augment its income by one percent this way, and also avoid depending on non-institutional sources of debt. Lastly, the household can increase its income by four percent by borrowing from institutional lenders and non-banking finance companies (NBFCs) instead of informal and unregulated lenders.

Cumbersome paperwork, bureaucratic hurdles

The next point of contention is what’s stopping households from accessing the right financial products. The household report points to some obvious reasons: high transactions costs, bureaucratic impediments, and trust gaps. There are socio-economic constraints as well—low-income households lack the confidence to engage with formal finance.

Here’s another example of how paperwork-related bureaucracy can dissuade people from accessing personal finance. The leader of a well-known NBFC mentioned at an event that they do one million loans every year. He said, every loan has four sets of documents: income, taxation, know-your customer (KYC), and bank statements. Assuming that each set has 10 pieces of paper, they deal with 40 pages per loan. And for a million loans, the NBFC has to manually verify a whopping 40 million pieces of paper. With digitised finance via cellphones and Aadhaar, more accounts can be opened paperlessly and instantly. This would allow a giant mass of humanity (already connected to the grid with their cellphones or Aadhaar) to access life-altering financial products such as savings accounts, health insurance, loans, and mutual funds.

Supporting paperless technology

The report highlights key areas where technology can increase consumer access to financial services. Most financial industry leaders agree that the secure digital infrastructure is already there to make paperless access a reality. The Ministry of Electronics and Information Technology and the RBI can provide clear directions for the use of e-sign for financial transactions and drive awareness campaigns on its benefits. Data shows that the Indian consumer is ready for secure digital technology—e-signs have been successfully utilised 21 million times in the past twoyears.

Even though the e-sign system and its legal framework is fully developed and operational, increased adoption is required in delivery of credit, insurance and savings. An express clarification from regulators would go a long way. More banks need to start using Aadhaar OTP-based e-KYC to enable instant account openings, and the RBI also needs to evaluate an increase in value limits (currently Rs 60,000 for loans and Rs one lakh for savings) on these instantly-opened accounts to enable mass adoption of this India Stack feature. This would not only reduce the need for paper-based manual KYC but also do away with the wet signature attestation of KYC documents, collecting which entails significant costs to the industry and significant wait for the customer. Paperless technology recommendations in the household committee report hold significant promise of customisation and scalability simultaneously.

In terms of ease of access to documents, there needs to be greater linkage between DigiLocker and various document issuing authorities. There are already two million users registered for DigiLocker. More issuers such as utility providers, and the Central Board of Direct Taxation need to, with the consumer’s consent, securely deposit documents in DigiLocker. Its increased usage will minimise the need for physical documents and enable easy submission.

Finally, all financial institutions should be integrated with e-NACH, a centralised, application programming interface-based clearing service that eases the work of banks, financial institutions, government and consumers by automating physical repayment mandates (for example, for EMIs) via one national paperless system. But, currently, only a limited number of banks are live with e-NACH.

In summation, I want to quote Amitabh Kant, Chief Executive Officer, NITI Aayog, who recently said: “The intention is if India’s productivity has to rise and India has to become a far more efficient economy, then we should push for paperless, cashless, and seamless transactions. That is the way we will have a big revolutionary movement forward.” Regulatory reform on paperless e-KYC via OTP, e-sign, e-NACH, and DigiLocker would allow more people to access formal finance on their cellphones, even in deeper geographies. With this shift, more people will be able to save, invest, insure, and borrow, allowing them to augment their household income by 10 percent or more and to be rid of the socio-economic ills that plague traditional finance.


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