Introduction
NITI Aayog, the Indian central government’s public policy think tank, had earlier this year released a report on “India’s booming gig and platform economy” (Report). The report focuses primarily on key issues that need to be addressed to achieve the full potential of the Indian gig and platform economy, and makes a number of recommendations for achieving such potential, and for the welfare of the gig and platform workers.
One of the commendable observations made by the NITI Aayog during the report is the lack of proper access to institutional credit to platform workers. The report recognizes the need for financial inclusion of platform workers, and recommends expanding a platform worker’s access to credit when lending institutions transition from traditional asset-based lending to new-age cash flow-based lending systems. The report also takes note of how financial technology (FinTech) startups address this issue through the use of technology, the basis of their business models, as well as the market opportunities available to such FinTechs.
In this article, we analyze this particular recommendation of the NITI Aayog in light of the legislative and regulatory framework surrounding lending in India and FinTech’s participation in such lending.
Universal applicability of the recommendation
Although the report makes the above recommendation only with respect to platform workers, we believe that the problem of inadequate access to institutional credit is equally relevant to all gig workers, whether linked to a platform or otherwise, as well as a large segment of the Indian the population that may not be categorized as gigs. Consequently, while the scope of the report is limited to gig and platform workers, the recommendation can be applied universally to all people who do not have access to formal credit systems.
Lending and FinTechs
The most important difference between asset-based lending and cash-flow-based lending is that loans granted under the asset-based lending system are secured by the borrower’s assets, while cash-flow-based lending is unsecured. Under cash flow based lending, lending institutions analyze the readily available data related to the borrower, which includes data points from past transactions, as well as information such as whether the person is a salaried person, has regular income or the social connections of the borrower, etc.
FinTechs have developed the ability to perform this analysis to underwrite loans in an external and automated manner, and on a real-time basis. On the basis of this analysis, loans can be issued to small creditors or micro-creditors for short durations of 10, 15 or 30 days, entirely through digital means, and without the need to submit documents or information. This ensures that the customer’s acquisition cost is kept to a minimum.
Regulatory obstacles
Availability of formal credit outside the traditional asset-based lending systems, entirely through digital means, is key to effectively achieving India’s goal of banking the unbanked, and FinTechs are poised to play an important role in realizing this goal, which is similarly reflected of the report. However, the Reserve Bank of India’s (RBI) recent alerts / directions / press releases / announcements regulating FinTechs participating in digital lending have caused a significant impact on the business models of these FinTechs. For example, RBI’s notification to non-bank prepaid payment instrument (PPI) issuers, preventing them from loading PPIs through lines of credit, has prompted several buy-now-pay-later FinTechs to temporarily halt their services and rethink their business models. Furthermore, the ability of balance sheet lenders to outsource credit guarantee activities has been significantly reduced by (a) RBI’s press release dated 10 August 2022 on ‘Recommendations of the Working Group on Digital Lending – Implementation’ (which can be accessed here) (Press release); (b) master instructions dated 21 April 2022 on the issuance and execution of credit and debit cards; and (c) the existing prudential norms applicable to all RBI regulated entities. This can consequently result in the erosion of the value that a FinTech brings to the table, thereby making the association of regulated entities with FinTechs less attractive. The press release also records the RBI’s stand that contractual arrangements such as the “First Loss Default Guarantee” that allow FinTechs to demonstrate their skin-in-the-game and incentivize regulated entities to offer credit facilities are “in principle” objectionable. However, the actual extent of regulation of such schemes is still unknown.
Our thoughts
The increasing regulation governing FinTechs appears to be in direct contrast to the ambitious role that FinTechs are predicted (in the report) to play in accelerating financial inclusion. With snowballing concerns about the sustainability of the business models of FinTechs, issues regarding the financing of FinTechs must also be considered, as new capital is extremely difficult to obtain and any capital raising is often only available at great cost, either by taking on debt or by dilution of equity rights. The problem of lack of capital availability for platform businesses and the need to provide financial support to these businesses has also been identified and discussed during the report.
In light of the above, it is imperative that regulation of FinTechs for the protection of retail consumers should not come at the expense of our FinTech industry. A working balance must be sought to be achieved to ensure the promotion of these FinTechs, and to fully exploit their potential for the development of technology-based financial products that improve financial inclusion, while maintaining credit standards throughout the country.
