0

0

0

0

0

0

0

0

0

finance | IST

Explained: Why regulations on fintech cos is advantageous to banks

Mini

RBI appointed Working Group on regulating fintechs announced its recommendations on Thursday and the RBI has now invited comments on the same recommendation say that fintechs can lend only if they ally with a company that has a banking or an NBFC licence.

RBI appointed Working Group on regulating fintech companies, announced its recommendations on Thursday and the Indian central bank has now invited comments on the same saying that fintechs can lend only if they ally with a company that has a banking or an NBFC licence.
The Reserve Bank had constituted the Working Group (WG) on digital lending on January 13, 2021, to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players so that an appropriate regulatory approach can be put in place. The report highlighted that lending through digital mode relative to physical mode is still at a nascent stage in the case of banks (Rs 1.12 lakh crore via digital mode vis-a-vis Rs 53.08 lakh crore via physical mode).
A lot of fintech companies or fintech valuations could now face challenges. Basically, the recommendations say that all lending has to be done only by those who are regulated by Reserve Bank, whose balance sheet is regulated by Reserve Bank and it is also putting some conditions on how fintechs will behave.
Now, among the restrictions, they say that first of all fintechs can only bring business to a regulated entity or they have to take an NBFC licence themselves. They can behave like a business correspondent bringing business to the banks thereby bringing more penetration.
The Reserve Bank working group has suggested the enactment of separate legislation to prevent illegal digital lending through apps. The other suggestions of the working group include subjecting the digital lending apps to a verification process by a nodal agency and establishing a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem.
The stakeholders can send their comments on the report to the RBI by December 31. Among other things, the group suggested the development of certain baseline technology standards and compliance with those standards as a precondition for offering digital lending solutions. The loans, it added, should be disbursed directly into the bank accounts of borrowers and serviced only through bank accounts of the digital lenders.
‘Buy now pay later'
Some of the fintechs were trying to explain it as just deferred payment. However, the Reserve Bank Group has said that it is a loan it shall be classified and therefore can be done only by a bank, it can't be done by the fintech itself.
First loss guarantee, no more
Fintechs were also trying to bring business by offering the banks first loss default guarantee. Now, they can't do that because they don't have capital. Thus, the first loss default guarantee product will have to die.
Data to credit bureau
Fintech companies will now have to give all their data to the credit bureau and they cannot access credit bureaus unless one through a bank.
These proposed changes will mean that for banks, it's a good thing because the fintech threat is now much lower. Maybe companies like SBI Cards will benefit according to Credit Suisse. Macquarie and Morgan Stanley also have more or less the same views that the disruption to banks from fintechs is not going to be real.