Responsible innovation

Govt intervention should address the concerns of fintechs

The recent regulatory action by the Reserve Bank of India (RBI) against Paytm Payments Bank has created significant unease in the system, particularly in the fast-growing fintech business. While the regulator has made it clear that action was taken after considerable bilateral discussion with the regulated entity, some believe it was a consequence of the regulator’s inadequate understanding of the nature of the business, which could stifle innovation. Such views against the regulator are not new in the financial sector. Regulatory intervention to contain risk and maintain financial stability, which affects the short-term growth of regulated entities, tends to invite such comments. Nonetheless, it is also correct that regulators need to maintain a fine balance where innovation is promoted without compromising the objective of financial stability. Interventions by Union Finance Minister Nirmala Sitharaman in this context will go a long way in achieving this objective.

Ms Sitharaman, in a meeting with leaders of fintech firms on Monday, suggested the RBI hold a monthly virtual meeting with fintechs and startups to address their needs. To be fair, new-age fintechs may be operating in areas where regulations are not very clearly spelt out. The regulator is also in the process of understanding the business and potential risks it can create for the system. Although the regulator regularly interacts with all stakeholders, putting in place a formal system will help both sides. Further, the Department of Financial Services has been asked to hold a daylong workshop for fintechs with law-enforcement agencies, providing them with an opportunity to raise their concerns. This should again help fintechs understand the system and voice their apprehensions. Both the regulator and government would do well to hear the concerns of fintechs and make necessary adjustments to enable responsible innovation.

The government has also formed an expert committee under Union Finance Secretary T V Somanathan to come up with uniform know-your-customer (KYC) norms. Improvement in such norms will benefit both financial services firms and consumers. There is concern that some fintechs don’t adhere to established KYC norms. Thus, the timely intervention by the finance minister should help address the worries of fintechs and enable a regulatory environment that promotes innovation and benefits the end consumer. The growth of fintechs will, however, remain a challenge for the RBI. While some have helped improve the ease of payments with the benefit of the Unified Payments Interface, a large number of them are enabling the flow of small-ticket loans from banks and non-banking financial companies (NBFCs). This has resulted in significant growth in consumer credit. In this context, the RBI has increased risk weightings for consumer loans (other than housing, education, vehicle, and loans against gold) in November last year. The idea was to reduce the pace of growth in unsecured loans.

The RBI has also raised concern over increased algorithm-based lending. Significantly increased consumer lending, if done without proper due diligence, can increase risk for both banks and NBFCs. It has been reported that some consumers are able to take credit from multiple platforms. Although it is likely that fintechs are reaching consumers who were hitherto excluded from the formal credit market, it still makes sense to move cautiously till the entire mechanism and all possible outcomes are not properly understood. Innovation and growth expectations should be balanced and not allowed to endanger financial stability.