– By Bikash Narayan Mishra
THE Financial Technology industry expected to disrupt the financial services industry. Through innovative technology, these new-age companies aim to provide more accessible financial products, low-cost deliveries and payment solutions.
However, disruption cannot come at the expense of regulation. In recent days, the Reserve Bank of IndiaThe precise and targeted actions against certain FinTech companies have caused some discontent within the sector. While affected companies are eager to address concerns and comply with regulations, some industry representatives fear this overzealous approach could stifle growth in the nascent FinTech sector.
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Before going into the details of RBILet’s first recognize this year’s Nobel Prize winners in economics, Daron Acemoglu, James A. Robinson, and Simon Johnson, for their work on how institutions shape economic development. In today’s highly polarized world, where the economics of development are often governed by vote shares and where subsidies are often equated with gifts, these economists have once again highlighted the essential role that societal institutions in the economic growth of a country. Not only are institutions expected to be free, fair and prudent, but their role can sometimes overshadow that of government, as their vision is long-term and free from political maneuvering. Nobel laureates have classified institutions into two types: inclusive institutions, which enforce property rights, protect democracy, limit corruption, and promote economic growth and development, and extractive institutions, which concentrate power and restrict political freedom.
In Indiathe debate on the independence of institutions has taken on considerable importance over the last decade. If certain allegations, particularly those emanating from employee associations, deserve introspection, many of them lack serious foundations. If India aspires to become a $30 trillion power economyit is crucial to further protect, maintain and strengthen our independent institutions. They serve as beacons, guiding the way forward and warning of potential crises.
And that is exactly what the RBI is doing by citing supervisory concerns related to loan pricing practices. In one of the cases, RBI said the action is based on significant supervisory concerns observed in the pricing policy of these companies in terms of their weighted average loan rate (WALR) and spread. interest charged on their cost of funds, which is considered excessive and not in compliance with regulations. This is where the real concern lies. Some of these new age companies, in their rush to capture walk on the other hand, neglect basic regulatory compliance. Such an approach is not only risky for the companies themselves, but also poses a threat to the entire ecosystem. Recently, the regulator has repeatedly implemented measures to curb the fast-growing personal loan and gold loan segments.
According to industry estimates, the Indian FinTech industry is estimated to be around $110 billion and by 2029, it is expected to reach an impressive number of around $420 billion, with a cumulative annual growth rate of 31 %. The government, while encouraging the sector, has also advocated for the appointment of a key contact point or nodal officer by Fintech companies to liaise with law enforcement agencies, which would ensure real monitoring of data breaches. In fact, there have been discussions about monitoring indigenous transactions and An –Money Money Laundering (AML) system catering to Indian fraud and crime scenarios which can be developed by Fintech companies. But before this comes to fruition, the FinTech sector needs to strengthen its self-regulation to prevent individual issues from affecting the entire sector.
A promising start has been made with the Fintech Association for Consumer Empowerment (FACE) authorizing the creation of a self-regulatory organization (SRO) for the sector. Other organizations are expected to follow suit. The RBI has already said that SRO-FT (FinTech) would operate “objectively, credibly and responsibly” under its supervision, thereby ensuring “healthy and sustainable development” of the sector.
That brings us back to this year’s Nobel Prize winners, who demonstrated that inclusive institutions have a positive long-term impact on economic prosperity. The successes of Germany and Japan, despite their massive defeat and near-occupation after World War II, bear witness to this idea. Both countries recognized their challenges and supported the development of independent institutions within their political frameworks. They have also made significant investments in skills building and placed emphasis on technological innovation and research.
The FinTech industry will benefit greatly if it supports independent institutions, like these SROs, allowing them to thrive as centers of innovation. The opportunity is vast, with over 530 million Jan Dhan accounts holding an average balance of Rs 4,000, waiting to be tapped. In the insurance sector too, penetration levels leave plenty of room for growth. FinTechs should not lose this opportunity by only focusing on leading the competition. A well-regulated sector will benefit all stakeholders and contribute to the vision of a Viksit Bharat.
The author Bikash Narayan Mishra is Senior Advisor, Indian Banks Association
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