Micro Finance Firms require Aadhaar Numbers of Clients

The unique identification project has been under legal and civil scrutiny since its launch on the basis of its scope of use and validity. The government is trying to make Aadhaar mandatory for receiving social welfare benefits, now private companies are trying to make Aadhaar their primary requirement for identification to avail services. The latest to join this trend is the Indian Microfinance industry. Microfinance offers lending to small business and persons with low income, the amount of the loan is usually below 1 lakh and the interest rates are 15% to 30% per annum. Last year the loans taken from these firm grew by about 89% without a large increase in the number of clients, indicating that multiple loans were being given to the same people. To resolve these issues two self-regulating microfinance organisations, the Microfinance Institution Network (MIN) and Sa-Dhan have made it a requirement to possess an Aadhaar to avail loans. Microfinance Institutions Network directed its 53 partners and 23 associates to collect the Aadhaar numbers of its customers by July 1st, 2016 to prevent over-indebtedness.

The CEO of Microfinance Institutions Network Ratna Viswanathan states that providing a long list of documents was leading to individuals manipulating identities and demographic data to procure multiple loans. This resulted in the Credit Information Report of individuals being inconsistent. This problem has also been recognised by other self-regulatory organisations such as Sa-Dhan. Sa-Dhan has been working in collaboration with the Unique Identification Authority of India (UIDAI) to organise camps for its borrowers to obtain Aadhaar cards. MFIs are using the Aadhaar to check the creditworthiness of its clients by comparing the databases of credit bureaus with the financial profiles of the borrowers.

Many micro finance firms are still using other forms of identification because they believe the information from the credit bureaus might be inaccurate as only financial records of the customer after receiving the Aadhaar will be recorded and previous debt will not appear in these records, thereby, giving them an inaccurate picture of the person’s financial condition. With all these conditions being put in place by institutions, the legality of these demands is still unclear. Legal researcher Usha Ramanathan states that the Aadhaar Act, 2016 does not make it mandatory to have an Aadhaar number to receive any service including the electronic Know Your Customer verification, which Micro finance institutions are making mandatory.

The Aadhaar Act does not allow seeding of numbers in any database, including the eKYC. The seeding of eKYC can only be done with specific consent under Section 8(3). The sharing of Aadhaar data by customers is raising a lot of security concerns with regards to the storage of this data and the use of this data by individuals for malicious purposes. There is also a growing concern among people that private entities in possession of this data will start selling it for revenue, presently this data is sold in a consolidated for, but there might come a time when individual data will be sold, stolen or mined from these databases.