RBI’s New Fintech Department and Regulations- A Good News for the Indian Fintech?

Shalmoli Sarkar — Fri, 14 Jan 2022 08:57:34 +0000

Demonetisation and contactless payments as a preventive measure in the pandemic has been a fillip to the fintech sector in India especially in digital payments and loans. As of June 2021, India has been home to 16 fintech unicorns, which speaks of its massive growth. The Indian market has also been a breeding ground for investors willing to invest in NFTs and cryptocurrency which is yet unregulated and holds much of a debate regarding it being a safe investment option.

According to a joint report by BCG and FICCI, India’s fintech industry is expected to reach $150-$160 billion by 2025. As the fintech landscape evolves and more players enter to serve various demographics, there is a need for the sector to be regulated especially those offering liquidity services which is the exclusive domain of banks.

RBI’s new fintech department to push innovation

The RBI has set up a separate internal department for fintech on 4th January 2022. This department aims to promote innovation and also identify the challenges and opportunities associated with fintech companies and address them promptly.

All matters related to the facilitation of constructive innovations and incubations in the fintech which might affect the financial sector/ markets and fall under the purview of the bank will be dealt by the internal fintech department including matters of inter-regulatory coordination and internal coordination.

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According to a joint report by BCG and FICCI, India’s fintech industry is expected to reach $150-$160 billion by 2025.

Widening the gates of credit data access for fintech

The RBI has already taken the first step to promote innovation in the Indian fintech companies by allowing them to directly access data from credit information bureau. Earlier access to data from credit information bureau was a privilege that could be enjoyed by specified users and regulated entities like telecom companies, insurance providers, rating agencies, and registered brokers. For assessing the credit profiles of customers, the fintech companies earlier used alternative data from social media footprints and from the bills of telephone and electricity to judge creditworthiness making the process cumbersome. This direct credit data access to millions of Indians will benefit the firms in the below way:

Take better credit decisions.
Several banks collaborate with fintech firms for the disbursal of loans digitally, therefore access to data will help banks make informed decisions while underwriting the credit.
Access to credit data will help these firms to develop tailor-made products for customers that require less documentation and lower interest rates.

New criteria is a challenge

RBI’s decision of widening the doors for data access might benefit a few fintech companies. Only those firms will be eligible to have access to data that are Indian-owned with diversified ownership. It is a major hurdle since the majority of the fintech firms in India are foreign VC/ PE funded and may not match the ownership criteria. The other criteria involves only those fintech firms to be eligible to process information to support regulated lending entities such as banks and financial institutions, whose net worth is Rs 2 crore. The reason to favour Indian-owned companies is to follow local data governance and compliance.

Cybersecurity is mandatory

With increasing data leaks, platform downtimes, and information theft, RBI has mandated the firms to have a certification from CISA ( Cybersecurity and Infrastructure Security Agency) and to have robust data protection in place, since data is the backbone for this industry. It is necessary to develop a strong mechanism to protect data and invest more in such mechanisms to evade cyberattacks in the future and cement people’s beliefs in financial technology processes.

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