RBI stance on fintech has government backing

The Reserve Bank of India’s latest move barring non-bank prepaid payment issuers from loading credit lines onto their products has the support of the government, which also wants a comprehensive regulatory framework soon for the fintech sector that has lately seen several complaints of potential breaches in prudential norms.

Government officials told ET that the RBI order, published late Monday, came after commercial lenders had raised concerns with the banking regulator over likely rule breaches by fintech companies.

“Banks had raised concerns with the RBI on possible breaches of anti-money laundering (AML) guidelines, and slackened Know Your Customer (KYC) norms by fintech companies,” an official aware of the matter told ET.

Safeguards concerns
The government too wants a more regulated framework for the fintech sector, said the official, adding that the RBI is in discussions with all stakeholders on the issue. A more comprehensive guideline is expected in the future, the official added.

Concerns that several new-age fintech companies seemingly assumed the role of lenders, without building adequate safeguards, may have prompted the banking regulator to impose curbs on fintech companies using prepaid instruments to channel credit,
ET reported Wednesday. The payments industry, on the other hand, saw the order as the central bank’s virtual endorsement that banks would be primary custodians of the sector’s innovation stack, potentially hurting their business case, ET reported.

On Monday, the RBI had issued a directive saying prepaid payment instruments (PPIs) can’t be used to push credit.

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“Such practice, if followed, should be stopped immediately,” the central bank said in its order. “Any non-compliance in this regard may attract penal action under provisions contained in the Payment and Settlement Systems Act, 2007.”

The Indian Banks’ Association, or IBA, had told the central bank that the burden of KYC norms with regards to transactions involving fintech companies was falling on banks, ET reported earlier. The banking industry grouping had further pointed out that since the lenders did not have visibility of underlying transactions, they could also be in potential breach of anti-money laundering guidelines.

Underreporting loan exposures

Banks had further demanded a level playing field, adding that some of the loans offered by these firms were not reported to credit bureaus. This increased the risk for other lenders that relied on credit bureaus to assess the creditworthiness of loan applicants.

In a recent report, the central bank had also observed that since fintech unbundled services across a wide number of domains, it is necessary to clearly demarcate responsibilities of various regulators over relevant aspects of the business entity. The report had also noted that the supply of funds for digital lenders could be more pro-cyclical and volatile due to the lack of standard credit guidelines.

“Further, credit activity outside the prudential regulation space could render credit-related countercyclical policies less effective,” it added.

Meanwhile, some companies, including EarlySalary, have temporarily disabled future transactions to comply with the RBI’s order, ET reported Wednesday, citing a company note.

On the other hand, Industry groupings such as the Digital Lenders’ Association of India (DLAI) and the Fintech Association for Consumer Empowerment (FACE) are seeking relief from the regulator, pushing for a deferment of implementation timelines.

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