Fintech committee recommends new legal framework for consumer protection

A panel on issues related to financial technology (fintech), in its report submitted to Finance Minister Nirmala Sitharaman on Monday, has recommended a new legal framework for consumer protection.

The framework encompasses fintech and digital services, a National Digital Land Records Mission, a unified database (stacks) for small industries and the agriculture sector, removing discriminatory regulatory barriers in digital payments infrastructure, and allowing non-banking financial companies (NBFCs) into agriculture credit.

The Steering Committee on fintech-related issues has also suggested cash flow-based financing for micro, small and medium enterprises (MSMEs); using drones and remote sensing to assess risk in agriculture credit and insurance; increasing the use of artificial intelligence among state-owned banks; and regulatory and legislative changes to enable fixed deposits and other financial instruments to be issued in dematerialised form and allowing their frictionless use as collateral.

Several proposals in the report are in line with the government’s intention to create and maintain central databases for different sectors. A similar proposal was put up in the recently proposed national digital health blueprint, to create a HealthStack. The panel also recommends using blockchain, which was also one of the main suggestions of a committee on digital currency. The fintech panel was announced by former finance minister Arun Jaitley in his 2018-19 Budget. 

The panel is headed by the secretary to the Department of Economic Affairs and includes the secretary to the Ministry of Electronics and Information Technology, secretary to the Department of Financial Services, secretary to the Ministry of Micro, Small and Medium Enterprises, chairperson of the Central Board of Indirect Taxes and Customs, chief executive officer of Unique Identification Authority of India, and a deputy governor of the Reserve Bank of India.

“The report outlines the current landscape in the fintech space globally and in India, studies various issues relating to its development, and makes recommendations focusing on how fintech can be leveraged to enhance the financial inclusion of MSMEs with a view to making fintech-related regulations more flexible and generate enhanced entrepreneurship,” said an official statement by the finance ministry after the report was submitted. The key areas on which the panel made its recommendations include agriculture, banks, NBFCs, small and medium industries, artificial intelligence (AI), Aadhaar, and know-your-customer (KYC) norms.

The panel has recommended using video-based KYC and validated documents through DigiLocker as alternatives to Aadhaar-based KYC, and said there should be no charges for uploading KYC data, though downloads can be priced. It has said financial-sector regulators should set deadlines for on-boarding the existing KYC data to the central KYC registry.

“Given the rapid pace at which technology is being adopted primarily by private sector financial services, the committee recommends the Department of Financial Services to work with (public sector) banks to bring in more efficiency to their work and reduce fraud and security risks. Significant opportunities can be explored to increase the levels of automation using AI, cognitive analytics and machine learning in their back-end processes,” the statement said.

The panel has recommended adopting regulation technology (or RegTech) and use-cases by all financial-sector regulators, making compliance with regulations easier, quicker, and effective.