Harnessing Financial Technology (Fintech) For Development

In view of the growing importance of the Fintech and its potential to unleash the economic growth, government formed the Steering Committee which was constituted under the chairmanship of Atanu Chakraborty to make Fintech related regulations more flexible and generate enhanced entrepreneurship in an area where India has distinctive comparative strengths vis-a-vis other emerging economies.

• The growth of Fintech, or the designing and provisioning of financial services by using new technological innovations, is one of the most significant developments in the financial sector in recent past. Fintech has the potential to play a big role in increasing access to finance, and in promoting the growth of MSMEs in the country. However, the broader Fintech landscape all over the world comprises of a variety of day-to-day financial services enhanced by technology.
• Mobile payments, cryptocurrency, investment advisory, insurance aggregators, peer-to-peer lending and some more services which traditionally required human capital, now form the Fintech landscape.

The Committee submitted report on 2 September, 2019 and recommended the following:

• Develop a Virtual Banking System:
  • The Department of Financial Services and the RBI may examine the suitability of ‘virtual banking system’ in the Indian context and the costs and benefits regarding allowing virtual banks.
  • They can prepare for a possible future scenario where banks do not need to set up branches and yet deliver the full-scale retail banking services ranging from extending loans, savings accounts, issuing cards and offering payment services through their app or website.
  • The Hong Kong Monetary Authority (HKMA) has recently issued guidelines for setting up virtual banks.
• Payment Infrastructure Access to Non-Banks: The government and the RBI must take steps to eliminate any discrimination in access to payment infrastructure to non-banks as compared to banks, with a view to enhance competition and innovation.
• Fintech for Cyber Security: Fintech should especially be used by Public Service Enterprises financial service companies to bolster cybersecurity, fraud control and anti-money laundering. Also, international fintech firms specialising in this field should be encouraged to set up their businesses in India.
• Rope in NBFCs in Agriculture: Since the NBFCs had made significant progress in leveraging fintech to increase their outreach, such companies should be incentivised to work in the agricultural domain by including them in credit guarantee schemes by the government.
• Develop Marketplace Lending Model: Debt financing in India should be improved by developing a marketplace model by reforming the current peer-to-peer (P2P) lending between banks platforms.
• Ease Exposure Limits: Restrictions on overall and individual exposure limits may be reviewed and options like allowing Mudra Bank to directly fund or co-fund SMEs and MSMEs through P2P platforms may also be examined as an alternative credit delivery channel.
• Easing KYC Process: Various options, like video-based KYC, making available validated KYC documents through a DigiLocker, and making these available for verification by service providers with customer consent, be considered early.
• Allow Drones to Private Agencies to Assess Cropping: Insurance companies and lenders in the agricultural sector should be encouraged to use drone and remote sensing technology, directly or using services of fintech companies, to assess discrepancies in self-reported cropping patterns, enabling more efficient delivery of both credit and insurance products and reduce credit/insurance risks.
• Enact a Consumer Protection Law for Fintech: This should be done early keeping in mind the rise of fintech and digital services and the potential threats to public financial safety through digital banking.
• Expedite Digitization of Land Records: Government should take up “on a war footing” was the digitisation of land records and also recommended a deadline of three years within which this must be completed.
• Ease Access to Small Savings Scheme: Provide ease of access and transactions to consumers, reduce risk of frauds and enable trading in secondary markets. All small savings products, which are neither accessible online nor available in demat form, should be brought on a common online platform in demat form. This would improve the efficiency of small savings scheme and improve public investments in such schemes pushing household savings up.

The report has stressed on the need to improve inter-ministerial coordination in the field of fintech upgradation and adoption. An inter-ministerial group on fintech should be formed at the Ministry of Electronics and Information Technology (MeitY), for exploring the application of the technologies like open application programming interfaces (APIs), blockchain, robo-advisors, big data analytics, and national data sharing and accessibility policy for use in government processes like welfare, taxation, and handling citizen grievances. The above recommendations highlights the role of Fintech as a game changer to realize the dream of making India a 5 trillion $ economy.