Fintech may emerge as substitute for traditional banking: RBI's CAFRAL

India’s fintech sector can potentially emerge as a substitute for the traditional banking sector in the near future, said a Centre for Advanced Financial Research and Learning (CAFRAL) report by the RBI.

The potential of digitalisation was evident from the strong relationship between the United Payments Interface (UPI) and lending from the fintech space. This rapid uptake of UPI shows how digitalisation can act as complementary to the traditional banking system.

However, the rapid digitalisation also necessitates quick and nimble regulation that promotes access and growth while ensuring financial stability at the same time.

CAFRAL is a non-profit organisation set up by the RBI in 2011 to promote research and learning in banking and finance.

In its first flagship report titled "India Finance Report", with “Connecting the Last Mile: Non-Banking Financial Companies in India," the report provides fresh insights into the non-banking financial (NBFC) sector in India.

The report highlighted the crucial role that NBFCs play in the formal financial system and the way it is harnessing the growth in the fintech space.

Along with the transformations, the NBFC sector is also going through changes in regulation and supervision which seeks to bring in best practices, end regulatory arbitrage, while ensuring the protection of customer interests; and leveraging technology.

"Exploiting the synergies between growth and technological change can lead to individual NBFCs becoming systemic. The challenge is to find the right balance of interventions," the report said.

Although digitalisation allows borrowers to undertake rapid transactions in real time, it increases the volatility in the banking system, necessitating the need for appropriate regulations.