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Lending fintechs warrant novel regulation methods to address risks, says RBI governor Shaktikanta Das

Credit: PTI

The growth of digital lending fintechs, who act as service providers for customers or banks, will increasingly emerge as critical pieces in the financial sector, said Shaktikanta Das, the Governor of the Reserve Bank of India (RBI). Speaking at the Times Network India Economic Conclave 2021 on Thursday, Das said these platforms need to be mindful about financial sector stability implications, cyber-security risks, customer protection and data protection aspects of their business.

Das said that the massive growth in both digital payments and digital lending platforms requires the financial sector to upgrade their IT systems to handle the “exponential surge” in transactions. The fintech market in India is expected to reach Rs 6 lakh crore by 2025 from Rs 1.9 lakh crore in 2019, the Governor said.

“In a world where the FinTech companies are leading in terms of the volume of digital transactions and playing a more active role in the banking and finance industry, it is important that the commercial banks adapt to the technological changes and work in tandem with these entities so that in future they are part of the ecosystem rather than competing with Fintech companies for business. A meaningful collaboration and co-existence in providing affordable and efficient value-added services would help both the worlds.” — RBI Governor Shaktikanta Das

Das said that the banking industry will be dominated by large banks and mid-sized banks in the decades to come, while smaller private sector banks, small finance banks, regional rural banks and co-operative banks will cater to the requirements of small borrowers. However, the Governor said that these digital lending platforms present new and complex trade-offs and therefore warranting new regulatory frameworks and novel ways of monitoring.

On data-led digital lending models

Das said that the traditional loan underwriting and credit evaluation will by replaced by new-age credit evaluation methods that use a combination of non-financial and reliable transactional data.

“The increased use of digital payments brought about by COVID-19 could fuel a rise in digital lending in the current decade as companies accumulate consumer data and enhance credit analytics. This in turn presents new and complex trade-offs between financial stability, competition and data protection; thereby, warranting new regulatory frameworks and novel ways of monitoring.” RBI Governor Shaktikanta Das

The Governor said that many fintech firms have already adopted data led models for lending, which is expected to become more mainstream than remaining a niche.

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“This will further facilitate the cause of financial inclusion. At the same time, however, it throws up a host of new challenges in terms of concerns of data privacy, consent, and security. Ethical behaviour of stakeholders in the payments value chain is important to surmount these concerns. Ability of financial sector entities to respond to these challenges may become a key factor in the determination of their competitive advantage”—RBI Governor Shaktikanta Das

On the Digital Currency

In February, Das had said that the RBI will soon publish a policy paper detailing its Central Bank Digital Currency (CBDC) or ‘Digital Rupee’ ambitions. The RBI’s guideline and proposed policy paper could address two aspects, the first is on capitalising on the benefits of blockchain technology and the second is on the operations of the CBDC, the Governor hinted at the time.

On Thursday, he said RBI is assessing the financial stability implications of introducing a CBDC.

“While we are working on introducing a digital version of the fiat currency, the Reserve Bank is also assessing the financial stability implications of introducing such a Central Bank Digital Currency (CBDC). As the underlying technology is still developing, we are exploring ways for a clear, safe and legally certain settlement finality, which is most crucial for a secure and efficient payment system. It also needs to be appreciated that there are not many practical instances of operationalisation of CBDC across the world; this calls for utmost precaution so that we can produce a safe and robust model.”—RBI Governor Shaktikanta Das

On Digital Payments

Das said that the growth rate of the domestic digital payments industry has been “phenomenal”, growing at an annual rate of over 55% in the last five years to $34.3 billion in 2019-20 from $5.9 billion in 2015-16. “With our commitment to foster innovation, and provide state-of-the-art and safe experience to users, we have placed ourselves in the forefront of payment systems on a global stage,” he said.

“Retail payment systems such as the UPI and Aadhaar Enabled Payment Service (AePS) have changed the entire dynamics of retail payment systems as they are being used at every nook and corner of the country. Last year when many other nations were writing cheques to provide stimulus to the people, we, in India, processed 274 crore digital transactions to provide Direct Benefit Transfer (DBT) to the people straight into their bank accounts“— RBI Governor Shaktikanta Das

The Governor said that the success of UPI has received admiration from across the globe, with many countries stating that they would want to develop similar retail payments systems.

“The UPI system also has the potential to unfold into a cheaper and faster alternative to available means for multilateral cross-border payments as well. It would be appropriate to mention that our RTGS also has multi-currency capabilities and with 24×7 operations now, there is a scope to explore whether its foot-prints could be expanded beyond India. With the Reserve Bank at the forefront of nurturing innovation, the day is not far, when we will experience cheaper, faster and safer cross border remittances“—RBI Governor Shaktikanta Das

On encouraging innovation

During his speech, Das said that the RBI has been encouraging the growth of fintech in India through the Payments Infrastructure Development Fund, the Regulatory Sandbox and the RBI Innovation Hub. “While doing all these, we need to be watchful of the risks associated with certain technological innovations,” he said.

The Reserve Bank’s endeavour is to ensure that the regulations do not constrain innovation; rather they should encourage and nurture innovation, without compromising the need for financial sector stability, cybersecurity, customer protection, etc. Optimality in regulation and supervision is the key. With this objective in mind, we have recently constituted a working group on digital lending, including lending through online platforms and mobile apps. Overall, an orderly growth of Fintechs will benefit all the stakeholders in the financial sector“—RBI Governor Shaktikanta Das

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