eKYC: Still not good enough

CAMS, the registrar-and-transfer agent for mutual funds, has come up with Aadhaar-based eKYC. With this, one can make mutual-fund investments for up to ₹50,000 per financial year. All you will require is your Aadhaar number and permanent account number (PAN). In order to use this facility, you can go to myCAMS (www.camsonline.com/mycams.aspx) and use the interactive procedure for Aadhaar-based eKYC and start investing. This means you don't have to go anywhere with a bunch of documents for in-person verification.

With this initiative, CAMS is implementing the SEBI's guidelines for Aadhaar-based KYC. In its circular dated October 8, 2013, the SEBI had enabled Aadhaar-based eKYC. It's not clear as to why the industry didn't implement this facility back then. This initiative is aimed at deepening mutual-fund penetration and providing a chance to invest without the painful paperwork of ordinary KYC.

CAMS is now integrating fund websites with the eKYC facility. Mr N K Prasad, President and CEO of CAMS, said, "Mutual fund penetration with citizens, especially in Tier 2 and 3 towns can be accelerated with Aadhaar-based eKYC. Younger generation who prefer digital experience can start investing with a complete digital solution for instant account opening," in a CAMS circular.

Clear thinking needed
Smooth, all-digital registration and KYC are one of the key facilitators of the wide expansion of investments. In fact, they are one of the key inputs to encouraging the shift from physical to financial assets. In the eKYC case, however, apparently, even the combined veracity provided by an Aadhaar number, a PAN number and a bank account do not carry enough weight to completely satisfy the Government of India that a mutual-fund investor is not a fake identity that is being used to launder money. You could have the first two, and, on top of that, you'd be investing and redeeming through a bank account, and even then you are permitted to invest only ₹50,000 in a year.

If you have identified yourself through an eKYC and wish to break through the ₹50,000 limit, then you must go through an 'in person KYC', which entails someone from your fund distributor or the registrar being given the self-attested copy of your PAN card, your identity and address proofs. Once this is done, the ₹50,000 limit is gone and you can invest any amount.

The trade-off here is not with actually preventing money laundering. Instead, it's with pretending to do so. This whole in-person KYC is an example of a mindless bureaucratic procedure which has no real impact on actually achieving its purported goal. Instead, it just makes things a little more difficult, a little more cumbersome for those who are trying to do something simple like make an investment.

Aadhaar was supposed to be a universal KYC for all residents of India. The government has already made schemes involving tens of thousands of crores on it. However, now it turns out that Aadhaar cannot be trusted for any except low-value investments, even when combined with PAN numbers and a bank account.

Filtering out
More difficult KYC processes act as a deliberate filter for keeping away low-value customers. This is effectively a tool of financial exclusion. KYC seems easily done for an affluent investor or a government officer, but for the saver on the margin, it creates enough friction that for a certain number the investment never gets done. At a time when financial inclusion has rightly been identified by the government as a major area of focus, eKYC limitations appear to be a needless obstruction.
On top of the problem of new savers, an all-digital KYC will also be a huge convenience for existing investors when they are asked to go through one of the periodic re-KYC exercises that have now become routine.