India is changing and is changing very fast. If you travel now along the length and breadth of the country, you can manage your expenses with minimal dependency on cash. This is because, from small Kirana shops to the posh supermarket; digital payments are in vogue. With the emergence of the Unified Payments Interface (UPI), India is making giant steps in terms of digital payments. Hearteningly, it has travelled many steps ahead of most western economies in the payments landscape. No wonder, Google has written to the US Federal Reserve to adopt a UPI-like payments mechanism.
Similar, though not the same, is the case in lending operations. Slowly and steadily, the ecosystem is evolving. Now, a person can apply for an unsecured, small ticket loan through a mobile lending app. Then an AI-powered algorithm evaluates the credentials of the borrower and approves the loan amount as per credit history. Though the total amount of credit disbursed comprises a minuscule portion of India’s total disbursals, such technology-powered solutions are revolutionising the retail credit market. The credit penetration is also growing with many hitherto neglected groups coming under the fold of the formal credit market. Therefore, democratisation of credit is underway in an eternally credit-starved market like India. Micro lending is another major growth area in the country.
Meanwhile, Indians rank high in terms of global cryptocurrency adoption. Some reports suggest that more than 10 crore investors are crypto owners now in the country. In a vastly unregulated space, Indians are making a beeline to invest in these digital assets. The government has already hinted on how it is trying to find a balance between the need for control while adopting to the new ways of this crypto-based economy. Precautions are already being explored on how to avoid mistakes of those economies with unaccounted and untaxed transactions. By treating crypto currency as an asset than a currency, the government is already showing its willingness to keep the rightful place of Indian Rupees in the new world.
Apart from these segments, digital modes are fast being adopted for cross-border payments, peer-to-peer lending, insurance, and asset management among others. Most of the credit for such a paradigm shift in India’s financial services sector largely goes to the new age fintechs.
RBI steps in with new department for supervision:
When the fintechs bring in tech-driven changes to the financial services industry, the regulator also takes note and brings in norms to maintain economic stability. Against this backdrop, the Reserve Bank of India’s decision to set up a new department for oversight on fintechs is a welcome move. “To give further focus to the area and facilitate innovation in the fintech sector in keeping pace with the dynamically changing financial landscape, it was decided to set up a fintech department in the bank,” the RBI said in a circular.
The formation of a full-fledge department from a division shows the seriousness of the apex bank in supporting the ecosystem. Over the years, the RBI has taken a series of steps to bring in tech-led innovative solutions in the financial services industry. In 2019, the central bank has come out with a framework for a regulatory sandbox ‘to provide a structured avenue for the regulator to engage with the ecosystem and to develop innovation-enabling and innovation-responsive regulations. Such steps have now culminated with a department that will have complete oversight over the fintech ecosystem.
Currently, the fintech space has varied players. The Indian payment landscape is dominated by global players like PhonePe and Google Pay with a lion’s share of all UPI transactions. While PhonePe is promoted by Flipkart in which the majority stake is owned by US-based retail giant Walmart, Google Pay is promoted by tech giant Google. Similarly, digital payments major Paytm, which made its market debut recently, is held by many foreign companies including Alibaba-owned Ant Group & Japan-headquartered Softbank.
Moreover, fintechs have emerged as the favourites of private equity & venture capital funds in recent years. Even the fintech ecosystem seems to come up age with the public listing of shares last year. In 2021, a whopping $9 billion was raised by fintechs in India, 200 per cent rise over the previous year. In a significant development, fintech startup BharatPejoined hands with Centrum Financial Services to acquire the beleaguered Punjab and Maharashtra Cooperative (PMC) bank, putting an end to the agonies of depositors. The consortium, subsequently, granted a Small Finance Bank (SFB) licence to begin operations as a bank. Last year also witnessed the public listing of Paytm and Policybazaar with Paytm’s IPO being the largest ever.
Rising complexity demands depth in oversight:
When the events unfold rapidly, a lack of concrete processes can spell disaster. Therefore, a separate fintech department in the RBI will provide the much-needed direction to the fintech movement. This is critical because increasingly banks and other financial institutions are partnering with fintechs to provide various financial services. So, any laxity in regulations or lack of clarity will not only affect the fintech ecosystem but its contagious effect will also be felt in the entire financial services industry. This can jeopardise financial stability. Therefore, a well-regulated financial system with a supportive regulatory environment will go a long way in creating a healthy fintech ecosystem in India. As India aspires to become a $1 trillion digital economy, all stakeholders have to work in tandem to achieve this objective.
Authored by Sanjeev Dahiwadkar, Founder & CEO of Moringa Techsolv