The Supreme Court order restricting banking and finance companies along with telcos from using Aadhaar data is likely to hamper balance-sheet growth of consumer finance companies in the short-term, says a report.
Last month, the Supreme Court had declared the government's flagship Aadhaar scheme as constitutionally valid but struck down some of its provisions including its linking with bank accounts, mobile phones and school admissions.
According to an India Ratings report, the order would increase operating cost, turnaround time in loan disbursement as well as fraud risk especially for retail lenders who have credit verification processes built around technology.
"We believe that replacing Aadhaar with the traditional methods of verification will slowdown customer acquisition in existing geographies and reduce the pace of geographical expansion, thereby impacting fresh disbursements which would impact portfolio growth and credit penetration," the rating agency said in a report.
The inability to use Aadhaar for authentication will impact the new-age NBFCs and fintechs disproportionately, as one of their core competencies is quick turnaround, it noted.
An increase in volumes is a necessity to drive operating leverage benefits for small ticket consumer loan companies, which may be impacted due to slowdown in portfolio expansion, it said.
The report said in the absence of Aadhaar based verification, the turnaround time for disbursing loans is likely to increase for few quarters until the lenders re-align their verification processes.
Companies which were able to cover a larger geographical area while sourcing and processing cases only on digital platform may have to convert to conventional models for physical verifications, including increase in paper work, human intervention and setting up verification networks, the report said.
"A typical eKYC verification cost could be below Rs 50, which could increase multifold," it said.
The report said the usage of Aadhaar for personal verification had earlier virtually eliminated the fraud risk, which could again rise.
The microfinance borrowers and lenders were among the biggest beneficiaries of Aadhaar-led identity verification.
"The microfinance borrower does not need to visit the branch to collect disbursements in cash if the disbursement happens in Aadhaar seeded account," the report said.The rating agency said the fraud risk would rise as was the case in pre-Aadhaar period.