The term Fintech has become well known lately. Financial Technology alternatively known as Fintech can be simply understood as the crossover between banking and technology. The preference given to the idea of a cashless society has facilitated the entry of online platforms that assist the efficient management of a person’s finances without hassle. Constant upgrades in the technological sector have played a crucial role in the evolution and use of Fintech in the country. The adoption of Fintech has been taken up most seriously by two countries, China and India. According to a report by the Ministry of Finance, almost 40 percent of the world’s total number of digital transactions occur in India.
Thus, such growth warrants a study into the workings of Fintech organizations in the country, their impacts, and the ramifications that they pose for the country.
EMERGENCE AND EVOLUTION OF FINTECH IN INDIA
The emergence of Fintech in India took place due to demonetization. While some platforms were existing at the time that offered virtual finance-related services, the country was dependent predominantly on cash. The sudden news of demonetization shook the country at its core, replacing the old notes with new ones, completely discarding the usage of old notes while displacing the 1000 rupee notes with 2000 rupee ones. As people crowded the banks to get their money ‘changed’, they were compelled to use online platforms to accomplish financial dealings and obligations. Initially hesitant, the citizens of the country soon realized that these platforms were convenient, safe, and flexible. Very soon, people started preferring these platforms over cash. Taking this into observation, the Government of India brought forth the Unique Payment Interphase (UPI). This brought a further change in the Fintech sector of the country, leading to the birth of many leading start-ups and of course, jobs.
What initially started as a mere mode of transaction that was accomplished online soon transformed into a full-fledged market, completely different from its origin. In less than five years, the Fintech market branched out to areas such as digital lending and insurance, virtual banks, EMIs, buy now pay later systems, etc. India, being one of the major players in the Fintech arena had a market valuation of $50 billion in 2021. This very finding is expected to group up to $150 billion by 2025. With over 6,000 Fintech start-ups in the country, the country displays a Fintech adoption rate of 87 percent as compared to the global 65 percent. The importance of Fintech in a country like India is such that almost every bank, both private and nationalized ones are being forced to adopt digital technology and virtual finance-related services to sustain themselves in the market. In recent years, several banks have partnered with Fintech start-ups to provide quality services, for example, the partnership between Kotak Mahindra Bank and Fintech start-up Pine Labs, or the tie-up of Axis Bank with BharatPe. These are just two examples out of many. With such developments in place, Fintech start-ups have raised the bar for offering virtual financial services in India.
KEY REGULATIONS AND LEGISLATIONS
As compared to the rate of growth of the Fintech industry in India, the development of regulation in policy or legislation has been slow. However, it is not as if no legislation or regulation can be used for Fintech growth in India. They are- The Payment and Settlement Systems Act, 2007, the Circular on Tokenisation-Card Transactions, 2019, the Master Directions on Pre-paid Payment Instruments (MD-PPIs), 2021, etc. Having said this, there is an absence of legislation that is formulated with the sole aim of regulating and checking the Fintech industry in India. This is a major loophole that is leading to increased unethical practices in this arena in the country.
The Reserve Bank of India (RBI) in 2018, brought forward a Fintech division under its wing. Although, this was later merged with the payment and settlement department of the RBI itself in 2020, given the ever-changing face of the Fintech sector in India. As of 2022, the Reserve Bank of India has created a sole department to fulfil the regulatory requirements and risk assessments that are coupled with the fast growth rate of this sector. There are also some regulations in place. Owing to the existence of multiple regulations, one shall be analyzed for the purpose of this blog. It is – the Working Group Report on Digital Lending released by the RBI in 2021. This report was brought forward after the global pandemic that led to unchecked and unregulated growth in the Fintech sector. The primary aim of this report was to protect citizens from unethical or dangerous virtual crimes and establish orderly growth in this sector. The report has tried to do this by examining the working of banks and Non-Banking Financial Companies (NBFCs) registered with the RBI in collaboration with unregulated Fintech entities that give rise to various financial services, for example, – The Buy Now, Pay Later (BNPL) Scheme.
The report laid down the following points to establish its aims:
- To strike down the generation of loans and disbursal of said loans by unregulated entities. Banks and NBFCs were recommended not to partner with unregulated entities in the course of loan generation or follow any form of structure that includes a First Loss Default Guarantee (FLDG) which assumes credit risks that are to be borne by these unregulated bodies.
- To ensure transparency of working, loan generation, disbursal of loan amount and repayment of such amount was to be operated directly through the bank account of the borrower and not through any third party. All disbursement of the loan amount was recommended to be made directly to the account of the borrower and not to any third parties.
There is, however, no provision laid down by the RBI regarding the loaning of money to Prepaid Payment Instrument (PPI) account holders which is a major downfall of this report. It leads way for fraud and other unethical practices.
As analyzed above, the Fintech sector in India has displayed and is expected to display exponential growth in India in the upcoming years. Having said this, the absence of regulatory provisions, legislation, or even a strict regulating body will hamper the development in this field. New technology, new developments, or the emergence of a completely new industry, the Fintech industry in this case brings about new challenges with its emergence. One of the very first challenges that the Fintech Revolution has highlighted in India is the presence of a technological lag. India has a diverse population, however, the bulk of the population is illiterate, rural, or just unable to deal with the rapid technological advancements brought about by the Fintech revolution in India. Secondly, the threat to Cyber and Data Security is of utmost concern given these applications often contain our bank details. The slow development of strict regulations in these regards are thus, extremely dangerous to the citizens and the development of a nation.
Author(s) Name: Ekoparna Datta Ray (University of Calcutta)