RBI working committee in favour of setting up NPCI-type agency for fintechs

RBI panel favours new structure for better supervision

The newly-formed working committee of the Reserve Bank of India (RBI) is in favour of setting up an agency which will act as an umbrella institution for financial technology (fintech) firms in view of growing complaints against the collection and recovery practices deployed by some digital lending applications (apps).

Currently, while digital lenders with non-banking financial company (NBFC) licences are monitored by the central bank, others, which function as loan-sourcing apps, are not regulated and are only registered with the corporate affairs ministry.

On January 13, the RBI constituted the working group on digital lending, including lending through online platforms and mobile apps, chaired by Executive Director Jayant Kumar Dash. It will “study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players so that an appropriate regulatory approach can be put in place”, an RBI statement said.

According to highly placed sources, the separate agency for digital lenders will adopt a structure similar to that of the National Payments Corporation of India (NPCI), an initiative of the RBI and the Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007.

Incorporated as a not-for-profit company in 2008, 10 banks, including State Bank of India, Punjab National Bank, Canara Bank, HDFC Bank, ICICI Bank, Citibank, and HSBC, were core promoters of NPCI. At present, NPCI has 56 member banks. “A similar participative model involving banks and large fintechs is being considered,” said a person aware of the development.

“The reason why the RBI is in favour of creating an independent agency is that it can be set up with minimal changes to the existing Banking Regulation Act and therefore the process will be a lot faster,” said a person aware of the development.

This agency would report to the RBI on a periodic basis. “The idea is to have a framework on how to approve and regulate fintechs,” said Satyam Kumar, co-founder, Fintech Association for Consumer Empowerment (FACE).

The role of this agency would be to ensure that fintechs comply with the regulations, both at the time of seeking registration and during the course of its operations.

Sources said five critical aspects had been identified so far, which would be top priority for the new agency.

“The agency will first look into the colour of money or the source of funding for fintechs. This will be the foremost priority,” said another person aware of the development. Besides, the holding structure of the fintech will also be scrutinised to ascertain how capital will be funnelled to the entity. Directors and key managerial persons would have to satisfy certain 'fit and proper' conditions to be appointed to the company, conditions similar to that of a bank.

A transparent grievance mechanism like the RBI’s banking ombudsman is also planned to be set up for customers to directly approach the agency in case of malpractices. Data protection, data sensitivity and security will also be an important consideration for the proposed agency.

Fintechs or loan apps registered as NBFCs with NPCI will be onboarded the new agency, provided they satisfy the required regulations.

For new outfits, the registration process by way of making an application will be mandatory.

"The objective is to eliminate illegitimate players from the system and ensure that the customer data and privacy is given the respect it deserves," said Kumar.