Did you start a mutual fund systematic investment plan (SIP) or started paying an EMI after the Supreme Court judgment on Aadhaar on 26 September? If yes, chances are that you might need to give a fresh auto debit mandate to your bank to ensure the SIPs and EMIs continue. The National Payments Corp. of India (NPCI) issued a circular a few days ago suspending e-sign-based e-mandate. In other words, if you had given the mandate for auto debit digitally through Aadhaar, it won’t be valid anymore.
Let’s understand what is happening and what you need to do.
What is e-mandate?
When you take a loan or start an SIP, you permit the lender or the mutual fund company to debit money from your account periodically. Earlier, this was done through the electronic clearing system (ECS); in the past few years, it was done through the National Automatic Clearing House (NACH). The mandate or permission is given by filling up and signing a physical form. The lending company takes the form to your bank as proof that you have allowed them to withdraw money from your bank account periodically.
“This process was made more efficient by e-NACH, in which instead of submitting a paper form, a digital submission and verification was made and the time was cut down to 2 days. What has been suspended is registering a mandate through e-NACH. There is no change in the operation of NACH,” said Piyush Khaitan, founder and managing director, NeoGrowth Credit Pvt. Ltd, a non-banking financial company mainly into digital lending business.
The e-sign-based e-mandate used Aadhaar-based e-signature to take customers’ authorisation. However, the Supreme Court judgment on Aadhaar declared the portion of Section 57 of the Aadhaar Act that enabled private companies to use Aadhaar for establishing the identity of an individual as unconstitutional. Hence, instant eKYC through Aadhaar which was being used by a majority of fintech companies was hit. The same mechanism is also used to verify an individual, which is called e-signature. “Since Aadhaar-based e-sign is itself under doubt now after the Supreme Court Aadhaar judgement, NPCI was concerned that the e-sign based e-mandate might be looked at as contempt of court and they decided to suspend the service,” said Harshil Mathur, co-founder and chief executive officer, Razorpay.
Who will be impacted?
In its circular, NPCI said that e-mandates presented and processed prior to the Aadhaar judgment date continue to be valid. However, people whose mandates presented and approved after that date (26 September) till 26 November will be valid till 15 February 2019, and they will have to resubmit standing instructions before 15 February 2019.
Those using fintech platforms for loans or investments could be hit as these companies were the first ones to adopt e-mandate. Given the relatively small ticket size of loans given by fintech companies, e-mandate was the perfect solution as it saved cost and time.
However, few banks switched to e-mandate, given the large ticket size of loans. So if you took a loan from a bank, not much will change for you. “The e-NACH was in an early phase of implementation. To the best of my understanding, only five banks were integrated and there too there was partial adoption,” Khaitan said.
In the absence of e-Nach, there are other alternatives you can explore to give a mandate to your bank for SIP and EMI payments. For example, you could use the auto debit facility if you have internet banking. Some large banks allow enabling auto debit for SIPs or other periodic bills through their Netbanking-based biller approving mechanism. In this process, you submit your bank account details to a merchant, who in turn sends a biller request to your bank. You are then required to log into your internet banking account and approve the biller. This is also allowed by some mutual funds. “You can make a mutual fund company a biller through your net banking service and the debit will happen automatically. Not all MF companies have this facility, and not all banks offer this facility. Only about 30% of MF companies allow this mechanism to be used and larger banks allow that,” said Srikanth Meenakshi, co-founder and COO, FundsIndia.com.
But this process does not work for lending companies. A consent-based mechanism to pull money from the borrower’s account is the ideal way for lending companies, Mathur said. “The reason pull is better than push, particularly for lending companies is because they cannot rely on a borrower pushing money to them each time. Lending companies need a legal backing to pull money from the account. And if the account does not have sufficient balance, which is similar to a cheque bounce situation, the lending company can go to court as it becomes a violation of contract under the Negotiable Instruments Act,” he said.
In the absence of e-sign-based e-mandate, while some investments can still be started online, borrowing from fintech companies might take a little longer as they will rely on paper-based mandate, which would take a few extra days to process.
However, banks are working with NPCI to develop alternative mechanisms to enable a digital mandate. “We are working with NPCI on mandate creation via Netbanking authentication. Just like a payment gateway transaction, you will be redirected to the bank’s Netbanking page where you want to set up the mandate and authenticate using internet banking login and password. There is also discussion now to bring in debit card-based mandate to authenticate. In the next couple of months, we will see this going live with banks having a large customer base,” said Deepak Sharma, chief digital officer, Kotak Mahindra Bank.
What should you do?
Only those who started their SIPs or EMIs between 26 September and 26 November, that too through fintech companies, will have to look out for another way to present a fresh standing instruction to your lender or mutual fund company. Look for communications from your lender or mutual fund. Those starting investments or EMIs after 26 November are already being asked to undertake a paper-based process, particularly for loans.