RBI Annual Report | Regulations key for fintech, involvement of Big Techs in the segment brings systemic risks

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The Reserve Bank of India (RBI) outlined its approach towards the Indian fintech sector, which is largely unregulated in areas such as digital lending and neobanking, saying that even though innovation thrives in the absence of regulations, legislation is needed to ensure sustainable growth.

The regulator also highlighted that the impact of the fintech segment is growing at both macro and micro levels. The impact is seen across financial stability, cybersecurity, consumer protection and financial inclusion.

"Greater use of technology accentuates the concerns related to cyber security. Further, the involvement of BigTechs in the BFSI segment also brings along systemic risks," RBI said in its annual report for the financial year 2021-22.

"All of the above have implications for financial stability and it is the endeavor of the Reserve Bank to mitigate such risks through careful choice of technology and frameworks, while providing an impetus to the FinTech in a wide array of useful applications in the financial service industry," the report added.

To handle these risks, RBI said that its approach will be to balance innovation with regulations and highlighted that the regulator's approach has been dynamically evolving along with market developments.

"As expected, such innovation first disrupts the market and once it establishes its constructive role, the regulators and authorities step in to regulate the space to nurture the innovation in a sustainable manner and to mitigate any associated risks," the RBI said.

Agenda for FY23

In the current financial year, the RBI said that it will explore a policy framework for digital banking, fintech and Big Techs, besides the phased implementation of the Central Bank Digital Currency (CBDC).

The RBI is also working on facilitating the setting up of 75 digital banking units in 75 districts of the country, an initiative first announced by Finance Minister Nirmala Sitharaman in the budget.

RBI is working on laying out a formal set of guidelines for the digital lending space and had set up a Working Group to make recommendations for the same. The Working Group submitted its report to RBI in November 2021 which focused on restricting lending from only RBI regulated entities, legislation for preventing illegal activities in the space, and setting up a Self-Regulatory Organisation (SRO), among other things.

In the annual report, RBI said, "Working Group on Digital Lending (November 18, 2021) is another exercise to enable the creation of a comprehensive regulatory framework for the digital space. The implementation framework would require close inter-agency coordination, including the government."

In an address to the media in April this year, RBI Governor Shaktikanta Das had said that the recommendations have received over 650 comments and the guidelines are likely to be issued in two to three months' time.

On neobanking platforms like Fi, Jupiter, RazorpayX, Open etc., Niti Aayog had floated a discussion paper in November 2021 which suggested licensing and regulating the space. However, the RBI is yet to take up the paper for further consideration, according to industry sources.

In FY22, RBI set up a separate fintech department a single touchpoint for all issues related to the sector and appointed executive director Ajay Kumar Choudhary to lead the vertical. The regulator also set up the RBI Innovation Hub and conducted a hackathon.

On the Innovation Hub, the report said, "The Hub will collaborate with financial sector institutions, technology, industry, and academic institutions and will coordinate efforts for exchange of ideas and development of prototypes related to financial innovations for creating an eco-system that would focus on promoting access to financial services and products and would further financial inclusion."

It will also develop the required internal infrastructure to promote fintech research and facilitate engagement with innovators and start-ups, RBI said.