The MeitY Goof Up!
It is ironic that as India continues to catch global attention with its disruptive digital financial services ecosystem, the lack of clarity in regulation acts as a speed-breaker. Last month the abrupt ban of 94 digital lending apps by the Ministry of Electronics and Information Technology -MeitY in short - hit the headlines. The strangest part of this episode is that reportedly there was no official communication, just lists of banned entities being shared on Whatsapp and some companies informed by Google, throwing the industry into a panic. And though the Ministry, RBI, industry associations and firms went into a huddle and resolved the matter in some days with the ban revoked for some legitimate players, there are still few answers. As explained by the RBI Governor during the press conference following the monetary policy, the Ministry had taken this step after the RBI had shared a white list sourced from NBFCs of apps they are linked with. The issue seems to be essentially for apps that had Chinese linkages or complaints for recovery harassment, but many on the list were apparently clone apps, unrelated to genuine entities. However, with no clear communication before and during the ban, the regulatory haze was summed up well by one fintech founder - “Why it has been happening, nobody understands. We thought that the RBI has come up with digital lending guidelines and now we can focus on building business, but now we know there is MeitY also.” It is time to fix this lack of regulatory clarity, especially across multiple regulators, that does irreparable damage to the confidence of new entrants to India’s financial inclusion mission. In fact, one lesson that comes out of this episode is that fintechs as financial service providers are under the RBI umbrella – any compliance action by other Ministries/regulators is best communicated through the RBI.
For microfinance, thankfully, reinforcement has come through from the Telangana High Court ruling that clears the air on dual regulation in this sector. The order coming more than a decade after the industry association MFIN had filed a case against the then Andhra state government makes it clear that RBI regulated entities do not come under the purview of state laws.
If we look at the FAQs released recently by the RBI on the digital lending guidelines issued last September, many points have been clarified for instance on the recovery process, on the relationship between the funder and the borrower etc. It is commendable that such explanations are being made, yet the industry is still fazed by the lack of clarity on several aspects e.g on the first loss default guarantee ("FLDG") model, industry players continue to seek guidance from the RBI on what is allowed and what isn’t. As Winnie Shekhar and Ruchika Bansal point out, the RBI appears to be moving in the direction of expressly prohibiting FLDG when it ideally should be putting in place a detailed regulatory framework for such models that will enable innovative ways of serving the unmet credit need in India.
And then another case showcasing the lack of regulatory transparency came up as the RBI imposed a penalty upwards of INR 3 crore on Amazon Pay India for “non-compliance with certain provisions” of the Master Directions on PPIs and on KYC. As always, without any specific details shared, there is no guidance for industry at large on which provisions are being violated, often leading to more paperwork in an effort to cover as many bases as possible. The Finance Minister’s Budget ask from all financial sector regulators to do a comprehensive review of all regulations should be implemented in consultation with the industry towards clarity and transparency for all regulated entities.
Meanwhile, India’s innovative digital payments system go global as cross-border real time payments are now in place with Singapore, using India’s UPI and Singapore’s PayNow systems. Going forward, as different countries have different payment systems, Mihir Sharma makes the important point that India, Brazil and others in G20 should work towards harmonising standards, rules and obligations for a digital public infrastructure that can serve the needs of global trade and investment.
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