Digital players will increasingly have a critical role across the banking sector in India, which is emerging as Asia’s financial technology (FinTech) hub, RBI Governor Shaktikanta Das said on March 25.
The governor’s comments signal increased focus on digital lending and fintech industry by the regulator. In January this year, the RBI set up a six-member working group to suggest regulations on digital lending.
Speaking at the at the Times Network India Economic Conclave 2021 in New Delhi, Das projected India’s FinTech market to grow to Rs 6.2 trillion in by 2025 from Rs1.9 trillion in 2019.
"FinTech is expected to challenge the financial sector with innovations and its exponential growth. Harnessing FinTech for customer services will effectively control costs and expand the banking and nonbanking businesses," Das said.
The increased use of digital payments induced by the pandemic can fuel a rise in digital lending in the current decade, he said.
Das said digital players will be a major part of four banking landscapes emerging in the current decade. The other three are: A few large Indian banks with domestic and international presence, several midsized banks with economy-wide presence, and smaller private sector banks, SFBs, regional rural banks and co-operative banks.
“In fact, digital players would increasingly emerge as critical pieces across all segments,” he said. Digital players would “act as service providers directly to customers or through banks as their agents or associates,” he added.
The RBI had said that the working group, which was set up in January would study all aspects of digital lending activity of both regulated and unregulated players to put in place an appropriate regulatory approach.
Das said each of the four segments needs to comprehend the future needs of the society and respond to the growth in the Indian financial sector. “IT systems need to be developed to handle the exponential surge in the number of transactions.”
Das cited the example of Unified Payments Interface (UPI) which took three years from 2017 to reach a monthly count of 1 billion transactions, but doubled to 2 billion a month in a short span of another year.
With increased digitisation and development of FinTech, the traditional ways of credit evaluation are expected to be replaced by new-age credit evaluation methods that focus on a slew of non-financial and reliable transactional data, Das said.
“Many FinTech firms have already adopted such an approach but it is expected that in times to come, this may become more mainstream than remaining a niche. This will further facilitate the cause of financial inclusion. At the same time, however, it throws up a host of new challenges in terms of concerns of data privacy, consent, and security,” Das said.
Ethical behaviour of stakeholders in the payments value chain is important to surmount these concerns. Ability of financial sector entities to respond to these challenges may become a key factor in the determination of their competitive advantage, Das said.
Setting up the working group on digital lenders in January, the RBI said it will have both internal and external members, the RBI said. The internal members are: RBI executive director Jayant Kumar Dash; RBI Chief General Manager-in-Charge, Department of Supervision, Ajay Kumar Choudhary; RBI Chief General Manager, Department of Payment and Settlement Systems; P. Vasudevan and RBI Chief General Manager, Department of Regulation, Manoranjan Mishra.
The external members are: Vikram Mehta, Co-founder, Monexo Fintech, and Rahul Sasi, Cyber Security Expert & Founder of CloudSEK. The working group will evaluate digital lending activities and assess the penetration and standards of outsourced digital lending activities in RBI regulated entities, identify risks posed by unregulated digital lending to financial stability, regulated entities and consumers, the RBI said.