Indian digital lending industry has leapfrogged in the past few years. There are many factors leading to its growth trajectory including the advancement in technology, emergence of startup culture, small businesses and online fintech companies.
However, to make digital lending easier, many banks and financial institutions have shifted their paperwork to digital mode. Additionally, digital lending process was heavily dependent on e-sign based National Automated Clearing House (NACH) that authorises the destination institution or bank to digitally credit or debit funds on required time intervals.
However, facilitation of electronic signature was done through Aadhar based authentication of the customer. Technically, this has raised many serious concerns about the use eNACH and even lead to its suspension. Before moving further, it is important to understand eNACH and its basic utilisation in easing out digital lending process.
Before introducing e-mandates or NACH, the process of form filling and sharing with the sponsor banks was extremely lengthy and painstaking. Moreover, due to the manual intervention and physical movement of forms, the turnaround time was higher and usually resulted in mandate rejection with lack of data and bank account validation.
In order to facilitate high volume interbank electronic transactions, the National Payments Corporation of India introduced National Automated Clearing House (NACH). It is a centralised system used for bulk transactions that automatically deducts funds for innumerable reasons like loans, EMI, micro — lending payments, rental payment, gold loans and other financial services.
Through eNACH registration process, the complex structure of conventional mandate registration becomes simpler and reduces operational costs.
Game changer for digital lenders
eNACH was one of the newest payment services that automated high volume transactions for banks and NBFCs. It was a secure and easy to use platform. Before the suspension of eNACH by NPCI, it played an important role in saving operational costs of authentication for micro - lenders.
Suspension reverse gear for digital lending industry
Since eNACH requires Aadhar-based authentication, the apex body does not allow private firms to obtain authentication from the UIDAI database.
The suspension of eSign based eNACH payment option by NPCI has hit the digital lending industry. As per the estimates of Omidyar and the Boston Consulting Group, Digital lending to MSMEs in the country to go up to Rs 6-7 lakh crore by 2023.
The decision to suspend eNACH is going to create a huge impact on smaller fintech startups. They are set to see high operational costs due to inability to use paperless model for automated collection of recurring payments as the NACH process entailed about ten times the cost in comparison to paperless mandate model.
However, to save the digital lending industry from such setback, the NPCI in consultation with UIDAI is identifying several other alternatives that can work as an appropriate solution in place of eNACH.
The need of the hour is a permanent resolution for Fintech’s which are facing this crisis. It has to be a joint effort by NPCI, UIDAI and other regulatory bodies to step in and resolve this crisis and ensure that the confidence in ease of doing business is sustained.
The author is the founder of zipNACH