Context: Underlining the important role of the fintech industry in building a responsible financial ecosystem, the Finance Minister has said that fintechs in India are driving more inclusion and influencing India’s financial ecosystem.
Understanding Fintech
- Fintech can be defined as designing and provisioning of financial services by using new technological innovations. Basically, fintech comprises technology-based businesses that compete against, enable and/or collaborate with financial institutions.
- Examples: Paytm, MobiKwik, Policy Bazaar, Phonepe, GooglePay etc.
- Growth Drivers: Rapid increase in the use of smartphones, internet connectivity, online shopping; Younger population; Advancements in technology such as Big data, AI etc; Improvement in Financial Inclusion; Launch of payment systems such as UPI; Regulatory support given by RBI etc.
- Present Status: India is among the world’s fastest growing fintech market with 6,600 FinTech start-ups. The Indian FinTech industry’s market size is $30 Bn in 2021 and has the highest FinTech adoption rate at 87 per cent.
Examples of Innovative Products of the Fintech Companies
- Crowdfunding is a way of raising debt or equity from multiple investors via an internet-based platform. Example: Kickstarter, FuelAdream etc.
- Peer-to-peer (P2P) lenders connect lenders and borrowers via an internet-based platform. Example: Faircent, Lendenclub etc.
- E-Aggregators to compare the prices and features of financial products. Example: Policy Bazaar Account Aggregators: An individual may have investments in fixed deposits with ABC Bank which comes under the purview of RBI, mutual fund investments with XYZ AMC which comes under the purview of SEBI and life insurance cover with DEF Insurance Corporation (which comes under the purview of IRDAI). Gathering and consolidating all the scattered data while applying for a loan may prove to be time-consuming. Hence, Individuals can authorise NBFC-aggregators to do this job and provide the information to Banks.
How Fintech Companies can Benefit the Indian Economy?
- Increase in digital payments
- Improvement in Lending and Investment through innovative tools such as Peer to Peer (P2P) lending, crowd funding etc.
- Provide finances to the MSMEs for trading of their invoices Example: TReDS Platform.
- Provide Insurance and advisory services
- Improvement in Credit Creation through the Account aggregator services
Recommendations of Subhash Chandra Garg Committee on Fintech Sector (2019)
- Virtual Banking: RBI should examine the suitability of ‘virtual banking system’ where banks do not need to set up branches and yet deliver the full scale banking services ranging from extending loans, savings accounts, issuing cards and offering payment services through their app or website.
- Fintech for Cyber Security: The fintech firms specialising in the field of cyber security should be encouraged to set up their businesses in India and provided necessary regulatory approvals for expanding their services in the country.
- Flow-based lending to MSMEs: The GSTN data integrated with TReDS exchanges should form the basis of a flow-based lending system for MSMEs by banks and NBFCs. In cash flow lending , a financial institution grants a loan that is backed by the recipient’s past and future cash flows.There is a need to develop fintech solutions to track the cash flows of the MSMEs.
- Reforming P2P Markets: The credit needs of MSMEs, households and individuals can be taken care of by creating a marketplace model of debt financing where savers, non-banks and banks are all permitted to lend. The Ministry of Finance should develop a marketplace model of debt financing in India.
- Remote Sensing and Drone Tech for Credit and Insurance: Insurance Companies and Lending agencies in the Agri sector should be encouraged to use drone and remote sensing technology for crop area, damage and location assessments to support risk reduction in insurance/lending business.
- Digitisation of Land Records: The Government should take up modernisation and standardisation of land records in the country on a war footing and complete such an exercise within 3 years.
- Legal Framework for Customer Protection: A legal framework for consumer protection should be put in place keeping in mind the rise of fintech and digital services.
- Development of Regulation Technology (RegTech): Regtech is a new field within the financial technology industry that utilises information technology to enhance regulatory processes. It puts a particular emphasis on regulatory monitoring, reporting and compliance. The financial sector regulators (RBI, SEBI, IRDAI, and PFRDA) must develop standards for RegTech by financial sector service providers to make compliance with regulations easier, quicker and more automated for regulated entities.
