RBI ups the ante!
Photo credit: Parij Photography from Pexels
Last month, the RBI raised the risk weights on consumer credit and bank credit to NBFCs – and just as the banks, NBFCS and fintechs were still scrambling to understand the implications, rebalance their portfolios and capital requirements, a fresh slew of announcements came through the Statement on Development and Regulatory Policies on December 8th, 2023. Clearly, all regulated entities will be on their toes in the new year.
To begin with, the increase in risk weights will impact the cost of capital in the industry, fintechs in particular could be looking towards sourcing funds from the market or towards consolidation. Already fintechs are reportedly going slow on small ticket loans, this will of course hit consumption and perhaps financial inclusion to some extent going ahead. Read Shayan Ghosh for a roundup of the impact of increase in risk weights and Vishwanath Nair on the move by Paytm to bring down the level of unsecured loans under Rs. 50,000 in a calibrated manner.
The latest announcement by the RBI includes the news that a unified regulatory framework for all regulated entities will be issued on connected lending. This has apparently been spurred by the trend of “innovative structuring of loans” from corporate entities that also run NBFCs, which may have run foul of the regulations. Secondly, detailed guidelines are also expected in line with the recommendation made by the Dash Committee on Digital Lending for a regulatory framework for web-aggregators of loan products. This will go a long way in improving the environment for digital lending, increasing transparency and trust in the ecosystem.
The RBI has also announced its intention to set up a cloud facility for the financial sector in India in a calibrated manner. This facility will initially be operated by Indian Financial Technology & Allied Services (IFTAS), which is a wholly owned subsidiary of RBI. Eventually, the facility will be transferred to a separate entity owned by the financial sector participants. The move has created quite a buzz as the rationale for this is not very clear to the market. As Arundhati Ramanathan writes, there is no concentration risk in this space – four MNCs and two Indian companies already host cloud services and two more Indian firms are on the cards – IFTAS does not have the deep pockets the others do and there is a risk that this “cloud will be 15 years behind state-of-art platforms”. Anand J reported on the divergent views from banks and fintechs on this announcement, and the lack of clarity currently on what services would be provided, whether this would be mandatory etc. is a cause of concern for some smaller players. What is interesting is that no one had any inkling this move was in the making!
All in all, it appears that the RBI is working diligently to catch up with the “innovative” changes in lending practices, and is now firm on plugging loopholes in existing regulations. The coming year promises many updates and a new phase towards financial stability for the industry and for customers.
Finally, two must-read links that are critical for the years ahead – a) Arti Singh has done a deep dive on the business model for account aggregators, with comprehensive data on how a price war could hurt the entire industry and b) a CGAP Focus Note by Peter Zetterli explaining the urgency in climate adaption , and how financial inclusion should be the cornerstone of climate action, outlining the roles and responsibilities of policy makers, social security and financial services industry.
There are more news and views links in our curated list below. Please also follow our Indicus Centre for Financial Inclusion page on Linkedin to continue the conversation.
The RBI has raised the limits on payments through UPI to hospitals and educational institutions from ₹1 lakh to ₹5 lakh per transaction, and the limits for execution of e-mandates without Additional Factor of Authentication from ₹15,000 to one lakh for some categories like subscription to mutual funds, payment of insurance premium and payments of credit card bills.
The RBI has proposed setting up a fintech repository to capture essential information about fintechs, encompassing their activities, products, technology stack and financial information.
Fintech Association for Consumer Empowerment (FACE) released its 8th issue FACETS with data on the fintech industry for Q2 FY 2023-24.
Mark Flaming, Ivo Jeník, Isabelle Barresès and Khin Moet Moet Nyein, CGAP report on research into lessons in digitisation of microfinance. Four MFIs from India were part of the study.
Access Development Services hosted the 20th edition of the Global Inclusive Finance Summit to unveil its annual report titled ‘Inclusive Finance India Report 2023’.
Dr Vivek Joshi, Secretary, Department of Financial Services, Ministry of Finance, asked banks and financial institutions to work on three areas for more effective financial inclusion - getting KYC done for inoperative accounts, nomination for bank accounts and strengthening cyber security.
Jocata, a fintech firm, launched Sumpoorn, India’s first MSME economic activity index, in association with SIDBI. Insights and methodology of this monthly index can be seen at the Sumpoorn website.
Madhurima Nundy and Pankhuri Bhatt, Centre for Social and Economic Progress have a working paper out on presenting a detailed review and analysis of India’s health insurance landscape, with a focus on voluntary health insurance (VHI).
Graham A N Wright, Partha Ghosh and Kunal Sharma report on the Smallholder Farmers’ Climate-Resilience Index from MicroSave Consulting.
Arshi Aadil and Gayatri Pandey, MSC discuss hidden pricing tactics that hinder digital financial services (DFS) adoption by low- and moderate-income (LMI) users and emphasize why financial regulatory authorities must promote transparency and accountability in financial services.
Caroline Pulver and Joep Roest, CGAP examine climate focused G2P programmes across the globe, including India.
Rounak Kumar Gunjan, The Ken reports on a closed - door meeting between top leadership of many banks and the Reserve Bank of India (RBI) earlier this month. The RBI once again tried to "push" banks to raise interest rates for savings accounts, while banks were in no mood to agree.
Ram Rastogi writes a comprehensive overview on potential changes in RBI’s penalty framework.