Explained I RBI faces criticism for PPBL action, but here’s what the regulator has done to promote fintechs

MC Explains

The Reserve Bank of India's (RBI) action against Paytm Payments Bank Ltd (PPBL) has brought criticism from a section of the fintech industry that said the central bank’s action will stifle innovation in the sector. In this backdrop, we explain what the banking regulator has done so far to support the industry.

In the recent past, the central bank launched a series of initiatives to promote the fintech sector in India, including creation of a dedicated fintech department, setting up of an innovation hub, SRO framework for fintechs and the regulatory sandbox, etc.

Reserve Bank Innovation Hub

In January 2022, the RBI set up a fintech department to give dedicated attention to the fast-evolving sector. Under this department, the Reserve Bank Innovation Hub (RBIH) has been set up, as a wholly owned subsidiary of the RBI, to promote innovation across the financial sector by leveraging technology and creating an environment which would facilitate and foster innovation.

RBIH is managed by a 10-member Board, chaired by Senapathy (Kris) Gopalakrishnan, co-founder and former co-Chairman, Infosys, The RBIH is expected to create an ecosystem for idea generation and development, through collaboration with tech innovators as well as the academia.

As per the RBI, the centre is envisaged to be the dominant centre for technological innovation with a focus on promoting access to financial markets and financial inclusion. The centre would develop internal infrastructure to promote fintech research and facilitate engagement with innovators and start-ups.

RBIH, during its two-and-a-half years of existence, has come up with transformative innovations.

Also read: Paytm rallies 4% on board nod to snap inter-company pacts with Payments Bank

Digital KCC

The first major successful project is the end-to-end digitalisation of Kisan Credit Card (KCC) for collateral-free loans (up to Rs 1.60 lakh). This facilitates the lenders with instant sanction of application and disbursal of the loan.

The digitalised process has eliminated the additional costs borne by farmers and brought down the average turnaround time considerably from weeks to a few minutes. The pilot is successfully running with 5 banks participating in the pilot, in 5 states.

Digital Dairy

Digitalisation has also been extended to dairy entrepreneurs where the scale of finance is instantly decided based on the milk pouring data. The pilot project of Dairy Lending has commenced with Amul in Gujarat in association with HDFC Bank and Federal Bank, the RBI said.

Public Tech Platform for Frictionless Credit (PTPFC)

The Public Tech Platform is an enterprise-grade open architecture IT platform, central to the operations of a large ecosystem of credit, to which financial service providers and multiple data service providers converge using standard and protocol driven architecture, open and shared Application Programming Interface (API) framework.

It obviates the need for cumbersome multiple integrations by individual entities/systems and brings efficiency to the lending process in terms of reduced cost of processing, improved turnaround time, scaling up, and expanding the reach of financial services amongst all categories of borrower groups.

The RBI launched the pilot of the Public Tech Platform for Frictionless Credit (PTPFC) on August 17, 2023. Currently, five loan journeys are live on the platform – Kisan Credit Card loan, Digital Dairy/ cattle loan, MSME loan, housing Loan and personal loan. Ten banks have already been onboarded to the platform and are using 13 data provided through the platform.

It is envisaged that the platform would become a critical ‘Digital Public Infrastructure’ in the lending space which has transformative potential. This will improve access for lenders by leveraging digital reach, and using the platform lenders can create fully digital loan journeys for customers.

Fintech forum

A fintech forum comprising representatives from fintech firms has been recently set up by the RBIH to promote advanced technologies, facilitate knowledge exchange, forge strategic partnerships, empower compliance and understanding and promote financial inclusion.

SRO framework for fintechs

The central bank has highlighted that the preferred approach is self-regulation within the fintech sector. In line with this, the RBI came out with a 'Draft framework for recognising Self-Regulatory Organisations (SRO) for FinTech Sector' on January 15, 2024.

The draft framework outlines the characteristics of a fintech SRO, encompassing functions, governance standards, etc. Stakeholders and members of the public are invited to provide comments and feedback on the draft framework until the end of February 2024. The final framework will be formulated, taking into consideration the responses received from stakeholders and the public.

Fintech Registry and Emerging Tech Repository

Presently, FinTechs are leveraging emerging technologies such as Distributed Ledger Technology (DLT) and Artificial Intelligence/Machine Learning (AI/ML), among others.

To gain a comprehensive understanding of the advancements in the fintech ecosystem to provide suitable support to the sector, the establishment of an Emerging Tech Repository is proposed.

The Fintech Registry will capture essential baseline information about fintechs in a secure and confidential manner, covering their activities, products, technology stack, financial details, etc. Under this, fintechs will be encouraged to voluntarily furnish pertinent information to the repository and registry, facilitating the development of appropriate policy approaches.

The FinTech Registry and EmTech Repository would be owned and operated by RBIH. The data and information gathered therein would help in formulating policy choices. The modules are currently under development and are expected to be operationalised by April 2024.

The regulatory sandbox

The regulatory sandbox framework is an initiative wherein entities test new innovative products/services in a controlled regulatory environment with or without regulatory relaxation.

The objective of the regulatory sandbox is to foster orderly and responsible innovation in financial services, promoting efficiency and bringing benefits to consumers. Till date, the RBI has conducted four cohorts on themes – ‘Retail Payment’, ‘Cross Border Payment’, ‘MSME Lending’ and ‘Fraud Prevention and Mitigation’. The fifth cohort is ‘Theme Neutral’ aimed at testing any product/ solution within the regulatory domain of RBI.

Also read: SC order | Standardisation of treatment rates will reduce undue charges, premium hikes: Bajaj Allianz CEO

Hackathons (HaRBInger)

The RBI has been organising a global hackathon titled HaRBInger to encourage innovation in financial services. This exercise helps to provide a channel for the fintech and start-up sectors to showcase innovation by developing solutions against existing problems in the financial ecosystem. The theme of the first edition of the hackathon was ‘Smarter Digital Payments’ and that of the second edition was ‘Inclusive Digital Services’.

One of the problem statements of the HaRBInger 2023 focused on developing ‘Innovative, easy-to-use, digital banking services for differently abled (Divyaang). Both the hackathons received encouraging participation from within India as well as abroad.

Account Aggregator
The Account Aggregator framework has been empowering consumers by enabling their rights over their own data held with the regulated entities.

This framework primarily is a way of managing consent and enabling consumers to digitally access and share financial assets data in a secure, transparent, and efficient manner. Envisaging the utility of financial data of consumers across regulated entities of all financial sector regulators, this framework was put in place in 2016.