Fintech and the Role of Regulations in India – In conversation with Mr. R Gandhi, Ex. Deputy Governor, RBI

Perfios, in association with India Fintech Forum, organized a session on the topic – Fintech and the Role of Regulations in India. The event was organized on Monday, the 28th of May, 2018 at the Perfios’ office, HM Vibha Towers, Koramangala. The discussion was led by Mr. R Gandhi, Ex. Deputy Governor, Reserve Bank of India. The event was attended by various fintech CXOs.

The key discussion points were the following:
• The role of Fintech in the industry and why it is unlikely to replace the conventional banking system.
• The need for regulation in the business.
• What kind of regulations are in place or are coming up in the near future

Role of Fintechs
The discussion revolved around the fact that Fintechs work as enablers in the financial industry in the country and are not meant to replace them. They either cater to a segment of customers who because of various reasons, are either under serviced by current financial institutions (eg Micro-finance institutions and P2P lending businesses etc) or they work as enablers helping the financial institutions with a part of their process (data aggregation, automated underwriting etc). Whereas banks in the other
hand are meant to cross-subsidize their assets and liabilities.

Need for regulations
Arguing in favour of regulations Mr. Gandhi explained that under the guidelines of the Reserve Bank of India, whenever an organization has a direct contact with money, it needs to be regulated. Regulations do seem to be a burden on such businesses in time when things are going well, but their need is recognized only when things go bad. Regulations help prevent, and in some cases help reduce the effect of an economic breakdown in the particular space.

New regulations
RBI has always been clear with the regulations regarding money i.e. where-ever there is movement of money through a system, it has to be regulated. Mr. Gandhi also mentioned that in certain services like data aggregation, pure technology companies and companies acting as agents of financial institutions, no regulations are needed. More has been elaborated in the Questions and Answers.

The following questions were put up by the attendees at the meeting
Q. Citing the recommendation for Fintechs to work along-side banks, why should they do so? Will banks safeguard Fintechs?
Ans. When a fintech works with a bank, it attracts less attention, which is always good for the business. It does not seem like the fintech is looking to eat away the bank’s business. Even in such a case, big banks like SBI won’t be affected, but the smaller players is where the criticism will come from.

Q. Would you agree that Fintechs working in a P2P business are fairly restricted by regulations?

Ans. P2P is a new business and any new business has to follow the standard regulations already set by the RBI. As time goes by, the business would stabilise, and the regulations would be relaxed accordingly. With respect to the number i.e. higher limit to the amount for P2P lending, it is an arbitrary number set up according to convenience. There is no justification for it and it is wholly dependent upon the players in the market to convince the RBI to raise the limit with suitable validated claims.

Q. What are the views of regulators on e-KYC? How should we as Fintechs prepare ourselves?
Ans. Aspects regarding e-KYC are not regulations but law of the nation. The current ruling is done in regard to internal security reasons and the right to privacy. SEBI did come under criticism for the same, but it is for the law. In the future however, it seems to be the case that e-KYC with Aadhaar will be allowed for financial purposes. Also, the ₹ 60,000 limit for transactions with e-KYC is unlikely to change.

Q. In the court of law there is a lot of ambiguity regarding the validity of digital signatures. Is RBI taking any steps to let the legal system know that this is valid?
Ans. e-docs are valid as per law, but case laws have not come up just yet. As per the law, an e-signed document is accepted, whether it will be followed in practice, there is no clarity as no case laws have come up. However, it is clear that the whole world is moving towards e-docs and so will we in the future. PKI based e-signatures are only considered valid and legal. Neither electronic signatures done on digital electronic pads which are not backed by PKI security nor Click wrap agreements can be considered for such purposes as they are not legal contracts.

Q. Will the provision for registration of an NBFC to have market cap of 2 crore be decreased?
Ans. It is unlikely for that to happen as the current value of 2 crore is quite low already. For an organization to enter the lending business with such a small amount of money, it would result in a very unstable business. Also, it is necessary to keep the non-serious players out of the scenario.

Q. What are your views on Fintechs working with a bank in the lending business, to share the loss in case of defaults?
Ans. Recently banks have been pushing for such a clause, but this is not in practice. It is not right. As per the spirit behind the banking correspondent model, banks should be taking the risk and the business correspondents will only be the supporting players. Sharing of risk was not considered. However, it may change when a threshold is crossed.

Q. What are your views on Payday Loans?
Ans. Payday loans are a normal thing. The interest rate is always under control but there is no specific number to that. In a free market a number is not supposed to be put on the same. If this rate crosses a limit, RBI will intervene. An example of microfinance institution failing was of the Andhra Microfinance crisis where RBI had to intervene.

Q. What are your views on Cryptocurrency?

Ans. I believe crypto currency will not survive. It did get a lot of attention because of the wide variation in the value. RBI has declared it is not a legal tender and should be treated like an investment. Also people are free to invest in anything they like in a free economy provided it is not illegal so RBI has decided not to ban cryptocurrency.

Q. Has RBI taken concern into the fact that new credit scoring mechanisms are using alternative data like SMS and location data of the customers for assessment?
Ans. As of now RBI has no consensus regarding it but credit assessment should go beyond credit score. It will consider looking into the matter after the Supreme Court gives its decision on privacy of information. Possibly the judgement on Aadhaar will give us a way forward.

Q. Will there be a sandbox kind of an environment in India where new Fintechs could experiment their ideas like there is in Singapore?
Ans. India has had such a sandbox for over 3 decades. IDRBT has set up four laboratories for the purpose of experimentation of new ideas in banking technology.

Q. Generally RBI is friendly to banks? Will it come with forums for Fintechs?
Ans. RBI has come up with ReBIT for the same purpose for enabling Fintechs to interact with RBI. IDRBT (Institute for Development and Research in Banking Technology) is another forum where technology groups can communicate with the RBI. Also regular departments like the Department of Information Technology and Department of Payment and Settlement Systems
can be approached for interaction and sound advice.

Recommendations and Suggestions
• The Fintechs should work in collaboration with established financial institutions to avoid unnecessary attention from smaller players in the industry. Fintechs should not try to compete with organized businesses as that is when the problems occur (eg. Uber competing with taxi unions).
• Regulations are a key aspect of a democratic environment and they should be welcomed as they are for the betterment of the people.
• Fintechs looking to interact with the RBI should approach it through any of the two institutions which understand technology as well as finance, the two institutions being Institute for Development and Research in Banking Technology, Hyderabad and Reserve Bank Information Technology Pvt Ltd, Mumbai.
• It is important to always be in contact with the regulators or RBI for any Fintech to be able to prepare for the future.
• Any new platform that touches money at any of its processes will be regulated and the regulations will be based on the standards already set up. Fintechs need to keep this thing in mind.