Digital payments are driving the fintech (financial technology) revolution in India, with transactions stacking up to $64 billion in 2017-18. With growing digital awareness and trust in technology, terms such as UPI, IMPS and NEFT are commonplace today.
What’s steering this fintech boom?
India’s growth story as a leading fintech nation can be credited to the government’s active interest in building a robust digital economy. Thanks to key transformational steps, the government has created a robust payment and identity infrastructure, a step towards bringing everyone under the ambit of the formal economy.
Deeper smartphone penetration and easy access to Internet over the past 3-5 years, along with data and information inter-linkages, have made technology- led decisions easier and quicker, fuelling the fintech story.
Over 1,300 new fintech startups formed during 2015-18 are a testimony to this; taking the total count to 2,050. Customers are becoming more open to searching financial products online and financial companies are leveraging this opportunity to meet demand through digital media. Online gold loans or supply chain financing are good examples here.
With the recent recommendations from the Steering Committee on FinTech, high emphasis is laid on regtech (regulatory technology), consumer protection frameworks, MSMEs, and agriculture, all with an aim to improve efficiency and reduce risk in the sector.
Let’s look at how the new recommendations will be a growth driver for the sector.
Regtech is a sub-set of fintech that utilises technologies to solve regulatory and compliance issues more effectively. Regtech largely uses artificial intelligence (AI) and machine learning (ML) to learn about different ways of fraud, and subsequently, how to mitigate them. With online financial transactions on the rise, the financial sector is more prone to fraud and cyber attacks.
The proposal for the financial sector to adopt regtech will bring in fresh investments. Regtech is key to the KYC process, which can be integrated with a centralised database, facilitating customer verification. The recommendation directs regulators to develop standards, but what is essential is the details and depth of the framework. Unless standards are specified, regtech companies will not be able to offer effective solutions.
Looking at the technology advancements made by private banks, public lenders have been instructed to ramp up technological capabilities to improve efficiency and reduce fraud-related issues. Public sector banks have been under immense pressure due to the NPA (non-performing assets) load. Here, AI- and ML-based algorithms can evaluate loan applications without bias, thus reducing the number of defaulters.
Consumer interest paramount
To protect consumers, a legal framework for consumer protection is on the table, specifically for fintech players. This will empower customers and enable them to try out new products and solutions. It will also boost investments in the fintech space.
Fintech to support MSMEs
The focus of the recommendations on MSMEs is to give a push to medium and small enterprises. Currently, MSMEs rely largely on banks for loans and financing while most banks prefer catering to companies with high credit scores. A large chunk of MSMEs is still not covered. That explains why only 25-40 per cent loan applications are approved.
The committee’s proposal to develop a cash flow-based financing linked with the GSTN (Goods and Services Tax Network) will encourage enterprises to file returns regularly and build a transaction history to have access to loans. Fintech startups can then utilise the data and offer customised products and services.
While this can be an advantage to MSMEs, it does not accommodate relatively new players. The approach could be more inclusive by aligning it with both the GSTN and the Ministry of Corporate Affairs to ensure both cash flow and financial health of the enterprise.
Agriculture in digital mode
The agriculture sector is heavily reliant on financial aid from the government. Old farming practices and droughts have left farmers with loads of debt and little livelihood. It has been suggested that a credit registry for farmers and a National Digital Lands Records Mission armed with land ownership data should be set up.
The credit registry promises to be a single-point-window on loan history of farmers, leading to innovative financial solutions. The land ownership records will allow the financial institutions to evaluate risk more efficiently. These databases will reduce operational efforts on KYC and allow financial institutions to venture aggressively into agriculture lending.
However, agriculture loans are less attractive due to low interest rates and high risks associated with them. Thus, a performance-based tax incentive or funding support will further encourage financial institutions and fintech players.
Farmers can benefit from the recommendations to insurance companies and lending agencies to adopt remote sensing technology for evaluation of land and assets when it comes to premiums or loan applications. They can get quick loans because of faster KYC and similarly, in the case of damages, insurance companies can assess the damage via drones and process claims faster.
What does future hold?
The fintech space in India is bound to see more action with lending and emerging trends such as agritech and healthtech, catering to a large set of customers with little or no access to banking services. That’s a huge promise for the industry to grow.
There is immense support of the government for fintech innovation. The plain fact is fintech allows those on the margins to be part of the banking system.
The recently announced Regulatory Sandbox is a step towards encouraging innovation. The general thinking is there is a need for stringent regulation for collection, storage, and application of confidential personal information. A data protection framework will be essential to establish privacy and confidentiality.
In order to have a steady workforce in the fintech space, necessary steps should be taken to include it as part of the curriculum in select universities and subsequently, go for partnerships with startups.
A stringent data protection framework and regulations of fintech players with a view to protecting customers are a boon for the industry.Madhur Singhal is managing director, Praxis Global Alliance. Views are personal.