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By BN Mishra
The FinTech industry is expected to disrupt the financial services sector. With innovative technology, these new-age firms aim to provide more accessible financial products, low-cost delivery, and payment solutions.
However, disruption cannot come at the expense of regulation. In recent days, the Reserve Bank of India’s precise and targeted actions against certain FinTech companies have caused some discontent within the sector. While the affected firms are eager to address the concerns and comply with regulations, some industry representatives worry that this overzealous approach could stifle the growth of the fledgling FinTech industry.
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Before we delve into the details of the RBI‘s actions, let’s first acknowledge this year’s Nobel laureates in Economics—Daron Acemoglu, James A. Robinson, and Simon Johnson—for their work on how institutions shape economic development. In today’s highly polarised world, where development economics is often driven by vote shares and subsidies are frequently equated with freebies, these economists have once again underscored the critical role societal institutions play in a nation’s economic growth. Institutions are not only expected to be free, fair, and prudent, but, at times, their role can overshadow that of the government, as their vision is long-term and free from political manoeuvring. The Nobel laureates have categorised institutions into two types: inclusive institutions, which enforce property rights, protect democracy, limit corruption, and promote economic growth and development, and extractive institutions, which concentrate power and restrict political freedom.
In India, the debate over the independence of institutions has gained considerable significance over the last decade. While some allegations, including those from employee associations, warrant introspection, many lack substantial grounds. If India aspires to become a $30 trillion economy, it is crucial to protect, nurture, and further strengthen our independent institutions. They serve as lighthouses—guiding the way forward and warning against potential crises.
And that’s exactly what the RBI is doing by ci ng supervisory concerns related to loan pricing practices. In one of the cases, RBI stated that the ac on is based on material supervisory concerns observed in the pricing policy of these companies in terms of their weighted average lending rate (WALR) and the interest spread charged over their cost of funds, which are found to be excessive and not in adherence with the regulations. This is where the real concern lies. Some of these new-age firms, in their rush to capture market share, are neglecting basic regulatory compliances. Such an approach is not only risky for the companies themselves but also poses a threat to the entire ecosystem. Recently, the regulator has repeatedly implemented measures to rein in the rapidly growing personal loan and gold loan segments.
According to industry estimates, Indian FinTech Industry is estimated to be around $110 billion and by 2029, it is projected to reach an impressive number of around $420 billion at a cumulative annual growth rate of 31%. The government while encouraging the sector has also made a case for appointment of key contact point or nodal officer by the Fintech companies to liaise with the law enforcement agencies, real- me monitoring of data infringement. In fact, discussions have been held on indigenous transaction monitoring and An -Money Laundering (AML) system catering to Indian fraud and crime scenarios that may be developed by the Fintech companies. But before this materialises, the FinTech industry needs to strengthen self-regulation to prevent individual issues from affecting the entire sector.
A promising start has been made with the Fintech Association for Consumer Empowerment (FACE) being allowed to establish a self-regulatory organisation (SRO) for the sector. It is expected that more organisations will follow suit. The RBI has already stated that the SRO-FT (FinTech) will operate “objectively, with credibility and responsibility” under its oversight, ensuring the sector’s “healthy and sustainable development.”
This brings us back to this year’s Nobel laureates, who have shown that inclusive institutions have a long-term positive impact on economic prosperity. The success stories of Germany and Japan, despite their massive defeat and near occupation after World War II, are testament to this idea. Both nations recognised their challenges and supported the development of independent institutions within their political frameworks. They also made significant investments in skill building and placed strong emphasis on technological innovation and research.
The FinTech industry will benefit greatly if it supports independent institutions, like these SROs, allowing them to thrive as centres of innovation. The opportunity is vast, with over 530 million Jan Dhan accounts holding an average balance of Rs 4,000, waiting to be tapped. In the insurance sector as well, penetration levels leave much room for growth. FinTechs should not lose this opportunity by focusing solely on leading the competition. A well-regulated sector will benefit all stakeholders and contribute to the vision of a Viksit Bharat.
About the author: BN Mishra – Advisor, Indian Banks Association
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