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Moneycontrol Pro Panorama | Financial innovation: RBI walks a tight rope

In today’s edition of Moneycontrol Pro Panorama: Red Queen in MPC minutes, a turnaround IT story, macro clouds gather, Start-up Street and more

June 23, 2022 / 07:13 PM IST

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The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

What’s fintech? It’s subprime lending on an app — that’s American investment manager Jim Chanos, who perhaps made the remark not entirely in jest. Financial innovation is under fire, in India and other parts of the world as well.

Locally, fintech companies are scrambling to make sense of a Reserve Bank of India circular that said loading credit lines into prepaid payment instruments (PPIs) such as wallets and prepaid cards is not permitted.

Now PPIs can be loaded with cash, a debit from your bank account, a debit card and even a credit card. On the face of it, one is tempted to ask what’s the big deal – if you can load a PPI using a credit card, why not a credit line provided by a regulated lender?

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But it seems that the regulator is worried about financial stability and unregulated lending.

In a regular credit card, KYC (know your customer) norms are handled by the card issuing bank. In the new business models, KYC is done by the fintech company while the credit line is provided by a bank, or more often, by a non-bank finance company.

There is some confusion since the RBI circular said the norms applied to non-bank PPIs. However, there are cases, where a bank-issued PPI (eg. Slice card) are backed by a credit line from an NBFC.

RBI, of course, is not comfortable with NBFCs getting into the credit card business. Nor does it seem to have much confidence in the underwriting models employed by fintech companies.

Moreover, there are also murmurs that some of the fintechs which are lending aggressively do not report transactions to credit bureaus, all of which can lead to instability building in the system without anyone realising it.

If that is the case, the whole Buy Now Pay Later (BNPL) gig would become a case for scrutiny. It is one of the fastest growing sectors in the fintech industry. Credit is also seen as a key avenue for profitability among fintech companies since very few make money from payments.

While these are early days yet, data from TransUnion Cibil show that BNPL users have higher delinquency rates on credit products compared to users of other forms of unsecured credit such as personal loans, consumer durable loans and so on.

The regulator has to walk a tight rope.

On one hand, it doesn’t want to stifle innovation. Quite often, products such as BNPL bring new customers into the formal financial system and help them set up a credit history. As Kotak Institutional Equities points out, such innovation then helps banks build scale where they let off, since they have access to low cost funds. The brokerage cites the examples of housing finance to self-employed, commercial vehicle finance and so on, where traditional NBFCs offered new products before banks built scale.

On the other hand, there is the question of financial instability, something which no regulator can take lightly.

It is not an easy task and Governor Shaktikanta Das said as much in a recent speech: “Large scale use of new methodologies in credit risk assessment can create systemic concerns like over-leverage, inadequate credit assessment, etc. Authorities and regulators have to strike a fine balance between enabling innovation and preventing systemic risks.”

In the same speech, the governor also talked about decentralised finance (DeFi) and the unique challenges it posed to regulators. Perhaps, he need not worry so much, at least on this count.

The goal of DeFi is to get rid of third parties involved in financial transactions and do away with a centralised governance body. The cryptocurrency crash has exposed the hollowness of such claims as several “Crypto networks that pledged to put users in control have put themselves in charge”, says this article from the FT. Moneycontrol Pro subscribers can read it for free here.

Investing insights from our research team

Why this attractively valued turnaround IT play merits a look

Gland Pharma: Inorganic opportunity a key watch in near term

Suprajit Engineering: Decent show in challenging times, long-term outlook promising

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Will macro headwinds dampen animal spirits in the domestic investment cycle?

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Clouds over steel stocks have darkened

Start-up Street: Lessons from the bursting of the Edtech bubble

Crypto Conversations | How NFTs are supporting Ukraine's cause in the war against Russia

Looming US recession need not break the back of Indian IT

The art of options adjustments 

IEA chief warns Europe to prepare for total shutdown of Russian gas exports (republished from the FT)


Technical Picks:
Lead futures, USD-INR, NTPC, JSW Steel, Canara Bank and Axis Bank (These are published every trading day before markets open and can be read on the app)

Ravi KrishnanMoneycontrol Pro
Ravi Krishnan is deputy executive editor at Moneycontrol
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