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Is Aadhaar the only reason for cancellation of eSign Mandates?

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The Supreme Court ruling scrapping Section 57 of the Aadhaar Act has had downstream impacts on Aadhaar-based technology solutions. Recently, the National Payments Corporation of India (NPCI) in a circular to its National Automated Clearing House (NACH) member banks announced discontinuation of Aadhaar eSign-based Mandates, citing the Supreme Court judgement. Digital lenders are upset as this increases cost of collections, but is the Supreme Court ruling on Aadhaar the only reason?

Here we look at eSigned Mandates in detail, their weaknesses, regulatory position, and impact on banks, to understand the bigger picture.

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Mandates and eSigned eMandates

NPCI, a private non-profit entity jointly owned by banks, operates NACH, an improved version of the Electronic Clearing System (ECS) which is operated by Reserve Bank of India (RBI) and commercial banks. NACH processes Mandates that enable automatic recurring inter-bank debit/credit transactions to enable standing instructions for payments. Traditionally, paper-based mandates, using cheques, were processed by both ECS and NACH. Being based on paper, they incur handling costs, take time to process, and suffer from problems such as signature mismatches that are only caught after costs are incurred.

In May 2017, NPCI announced they were now processing the eSign variant of mandates. It allowed banks and corporates to obtain a mandate signed electronically using Aadhaar eSign. This is recognized as valid form of digital signature by CCA, and the 2015 amendments to Negotiable Instruments Act mean digital lenders will get the same protection against mandate bounces as cheque bounces due to insufficient funds.

There were techno-legal issues with eSign independent of the legal challenge to Aadhaar, and technological weaknesses in Aadhaar that posed a severe risk to users and uncertainty to businesses.

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But NPCI’s launch of eSign-based mandates might have provided confidence for startups to use the technology, without bothering about palpable legal and technological risk.

Consent and fraud

In March 2018, Moneycontrol reported an incident where a Delhi-based coaching centre, while ostensibly performing eKYC, in reality acquired an eSigned Mandate for a loan from a digital lender to the individual, disbursed directly to the coaching centre.

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The lack of perceptible difference between verification of identity (Aadhaar authentication), approval to share KYC data (Aadhaar eKYC), authorisation (Aadhaar eSign), and financial authorisation (Aadhaar eSign based Mandates) is how such a fraud can be pulled off. The individual is not notified of the context for Aadhaar authentication, and a single OTP can do any of the above, thereby putting every Aadhaar holder at deep risk.

Despite the known risk and reports of misuse, regulatory silence continued, and so did the usage of eSigned Mandates.

Is this the SC judgement’s impact, or an outcome of banks vs fintech?

The mainstream narrative behind the shutdown of eSign based Mandates is that it has been determined necessary in order to maintain compliance with the Supreme Court ruling on Aadhaar. While there may be some connect, there are multiple other factors as well.

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