The high-level Nandan Nilekani-led committee on deepening of digital payments appointed by the Reserve Bank of India (RBI released its report to the public on 3 June. The committee has recommended that financial sector entities come together with a data sharing proposal to share minimum know-your-customer (KYC) data, with adequate oversight and safeguards as approved by the Financial Stability and Development Council. In other words, a bank should be able to share KYC data with a mutual fund when the customer invests in the fund from his or her bank account. The committee also recommended innovation in the process. In the short term, the committee suggested a ‘simplified procedure’ of KYC for cases in which the first transaction is from a verified KYC account. By way of example, the committee said that there should be a simple KYC procedure for opening a second financial account with the same or sister institution, a wallet account, mutual fund account or purchasing an insurance policy from a KYC-compliant bank account. The committee, however, stopped short of defining ‘simple KYC’. The committee’s recommendation echoed a long-standing demand from the mutual fund industry and other allied financial services industries. We take you through how the recommendations will help different financial sectors.
Mutual funds
At present, investing in a mutual fund, even for customers who have completed KYC in their bank accounts, requires a second round of KYC. The procedure involves submission of identification and address proofs along with photographs. In addition, the distributor or adviser also needs to physically meet the customer to carry out ‘in-person verification’. This requirement greatly hampers the growth of mutual funds online. Some mutual funds and other intermediaries have come up with ‘video-based KYC’ but this has only addressed the problem to an extent. “Seventy percent of our current customers are first-time investors. This number can grow three to four times faster if something like this comes into play," said Sanjiv Singhal, founder and COO, Scripbox, an online mutual funds platform.
It also affects access to mutual fund investments for those in remote areas. “KYC often puts off first-time investors and creates inconvenience for advisers and distributors," said Mrin Agarwal, founder, Finsafe India Pvt. Ltd, an investment advisory firm. The Nilekani committee proposed that there should be a simple KYC procedure for opening a mutual fund account funded from a KYC-verified bank account. However, inflows into such a folio and redemptions to it must be restricted to this account.
“It is a good move for onboarding of customers in mutual funds since bank account is linked on the basis of bank KYC," said A. Balasubramanian, chief executive officer, Aditya Birla Sun Life AMC. Industry executives have identified KYC as a major trigger for growth.
“This simplification for onboarding bank KYC-complied investors will go a long way in the growth of the industry," said Sundeep Sikka, executive director and chief executive officer, Reliance Nippon AMC.
Digital wallets
Digital wallets saw exponential growth in India after demonetization. However, the requirement to complete full KYC led to a number of such wallets becoming inoperative or pared down to basic features in March 2018. Users could not load fresh money into them or carry out remittances from them. Only existing balances could be used to pay for goods and services. The Nilekani committee recommended that wallets and small accounts that may have become dormant due to KYC deadlines and have only been loaded from KYC-compliant accounts should be considered for reactivation. It also batted for simple KYC of wallets, which are funded from KYC-verified bank accounts.
Insurance
The committee’s proposals also saw support from the insurance industry. “If the customers’ account with the bank being KYC-compliant is recognized as deemed KYC, then it will reduce the burden on the insurance company to undertake a fresh KYC, thereby simplifying the process of policy issuance," said Ashwin B., chief operating officer, Exide Life Insurance Co. Ltd. However, a note of caution was also raised. “At present, in an online or cheque payment, there is no way to know if the payment has been received from a KYC-compliant account. Hence, the challenge for the insurance company would be to verify that the customer has a KYC-compliant bank account at the time of onboarding," he said.
Standard bank accounts require KYC procedures to be completed before they can be opened. RBI rules contemplate a more basic KYC for online accounts with a maximum balance of up to ₹1 lakh, which can stay operational for up to 12 months before full KYC is done. Addressing this concern, Saranya Gopinath, co-founder, Digital India Collective for Empowerment, said that OTP-enabled accounts only seek to give a larger time window to comply with the ‘full KYC’. “Considering that the limited KYC bank accounts (OTP authentication enabled) do not allow for a relationship beyond a year, this problem will be self correcting," Gopinath said.
Puneet Nanda, deputy managing director, ICICI Prudential Life Insurance Co. Ltd, said that the proposed initiative is a welcome move which will reduce paperwork and pave the way for quick and hassle-free purchase process of insurance policies. “The move will further help in improving insurance penetration in the country, leading to greater security for large segments of the society," said Nanda.
There is little justification for repeating the same KYC procedure across financial products. The time and cost this entails could instead be used for the benefit of investors. If implemented, the recommendations of the Nilekani committee can set the stage for a rapid acceleration in mutual fund, wallet and insurance penetration in India
“This simplification for onboarding bank KYC-complied investors will go a long way in the growth of the industry," said Sundeep Sikka, executive director and chief executive officer, Reliance Nippon AMC.
Digital wallets
Digital wallets saw exponential growth in India after demonetization. However, the requirement to complete full KYC led to a number of such wallets becoming inoperative or pared down to basic features in March 2018. Users could not load fresh money into them or carry out remittances from them. Only existing balances could be used to pay for goods and services. The Nilekani committee recommended that wallets and small accounts that may have become dormant due to KYC deadlines and have only been loaded from KYC-compliant accounts should be considered for reactivation. It also batted for simple KYC of wallets, which are funded from KYC-verified bank accounts.
Insurance
The committee’s proposals also saw support from the insurance industry. “If the customers’ account with the bank being KYC-compliant is recognized as deemed KYC, then it will reduce the burden on the insurance company to undertake a fresh KYC, thereby simplifying the process of policy issuance," said Ashwin B., chief operating officer, Exide Life Insurance Co. Ltd. However, a note of caution was also raised. “At present, in an online or cheque payment, there is no way to know if the payment has been received from a KYC-compliant account. Hence, the challenge for the insurance company would be to verify that the customer has a KYC-compliant bank account at the time of onboarding," he said.
Standard bank accounts require KYC procedures to be completed before they can be opened. RBI rules contemplate a more basic KYC for online accounts with a maximum balance of up to ₹1 lakh, which can stay operational for up to 12 months before full KYC is done. Addressing this concern, Saranya Gopinath, co-founder, Digital India Collective for Empowerment, said that OTP-enabled accounts only seek to give a larger time window to comply with the ‘full KYC’. “Considering that the limited KYC bank accounts (OTP authentication enabled) do not allow for a relationship beyond a year, this problem will be self correcting," Gopinath said.
Puneet Nanda, deputy managing director, ICICI Prudential Life Insurance Co. Ltd, said that the proposed initiative is a welcome move which will reduce paperwork and pave the way for quick and hassle-free purchase process of insurance policies. “The move will further help in improving insurance penetration in the country, leading to greater security for large segments of the society," said Nanda.
There is little justification for repeating the same KYC procedure across financial products. The time and cost this entails could instead be used for the benefit of investors. If implemented, the recommendations of the Nilekani committee can set the stage for a rapid acceleration in mutual fund, wallet and insurance penetration in India.
