Fintech firms remain bullish despite rigid RBI norms

The Reserve Bank of India’s (RBI’s) 2022 digital lending guidelines may cause some disruption for now, but they are expected to bring more clarity to fintech companies. “I think most of the changes on the regulatory side have been quite positive,” said co-founder and CEO, Razorpay, Harshil Mathur, adding that it may cause some disruption in the short term, but “I think in the long term they are good for the customers and good for the ecosystem”.

In September, the central bank issued the guidelines with the aim of drawing a clear line when it comes to the activities of digital lenders.

Also Read: Indian fintechs face tough 2023 as investments cool, says Bain

In July, RBI Governor Shaktikanta Das said that digital lenders must operate under the licenses granted to them instead of engaging in activities without permission. Das’ statement followed several news reports about harassment, extortion and other illegal practices by digital lending companies.

In fact, in 2021, an RBI task force on digital lending had proposed introducing a separate legislation to curb illicit activities in the space. While the latest guidelines specifically mention banks, non-banking financial companies (NBFCs), digital lending platforms and lending service providers, they affect all kinds of fintech firms.

But the industry believes that the fact that the RBI has recognized them as legitimate players is an important first step. For the first time, RBI has recognized the presence of certain fintechs or fintech platforms that form part of a lending service provider or a digital lending app for a regulated entity, said Nageen Kommu, founder and CEO, Digitap.

“From that point of view, it is a big step for RBI where they have recognized the presence of these fintechs and come up with guidelines on how the KYC validation should be done and how data should be taken from the customers,” he added. .

The guidelines also led to the closure of illegal Chinese loan applications and brought consumer interests to the fore. However, they indicate a preference for regulated entities such as banks and non-bank lenders that carry out digital lending rather than pure digital lending platforms, thereby disrupting the latter, experts say.

For example, the guidelines ask regulated firms to ensure that any fees and charges payable to various lending services are paid directly by them and not charged by the lending service provider directly to the borrower.

Also read: What awaits Fintech users in 2023?

“It (RBI) has not been happy with the pure-play platforms because they have not been under the supervision of the regulator and what not. It has come very clearly in the guidelines,” said Madhusudan Ekambaram, CEO and co-founder, KreditBee.

“The pen-play platform companies have been forced to look for an NBFC license, come under the supervision of the regulator and operate. In the long term, the guidelines are very stabilizing. But there has definitely been some short-term pain in the market,” he added.

In addition, ambiguity about various aspects of the First Loss Default Guarantee (FLDG) has left digital lenders scratching their heads.

Simply put, a first-loss default guarantee is an agreement where a third party agrees to compensate up to a certain percentage of defaults in the lender’s loan portfolio.

FLDG deals have been popular among fintechs, which want to partner with banks to target borrower segments that traditional lenders don’t cater to, such as freelancers and micro-enterprises, among others.

What fintech wants

“..any form of regulation must explicitly state what is permitted and, as far as possible, clarify what is not permitted. Ambiguity – as in the current case of FLDG partnership – creates confusion and divergence of views in the ecosystem, says Aditya Kumar, Co-Founder and CEO, Niro.

“Apart from this, I would ask that the RBI continues to take an advisory, customer-protective first approach to regulations, to ensure that innovation is not stifled,” he added.

In addition to the FLDG, there is a need for more clarity about the nature of data that lenders can obtain from customers for insurance purposes and how that data can be used.

In addition, there must be a whitelist of authorized digital lending platforms so that borrowers can make informed decisions, says U GRO Capital’s legal and compliance officer Sunil Lotke.

Nevertheless, experts acknowledge that the digital lending rules have been a step in the right direction for the fintech industry as it has brought finctechs within the ambit of regulatory compliance.

Moving forward, 2023 could see the formation of more self-regulatory organisations, which will see regulated entities drive more accountability for consumer rights, experts say. In the days to come, fintechs are certain that the central bank will issue sound and operational norms for governing digital lenders.

“Looking ahead to 2023, we are confident that the digital lending sector will witness robust growth. This has been helped by rising per capita income, greater inclusion of formal finance and increased internet penetration in rural areas, said Souparno Bagchi, Chief Operating Officer, Balancehero India. “With tools like sandboxes, incubators and developed India Stack solutions, we expect to help businesses and regulators create collaboration as the technology and product side of the fintech industry expands.”