If a large number of fintechs are upset because they are being asked to play by the rules, they need to grow up. One appreciates their ability to reach out to borrowers who are otherwise unable to access organised credit, but the fact is that quite a few of them have been using ingenious methods to do what they are not permitted to—lending. The regulator is justified in stopping them from running their businesses by renting balance sheets because their “innovation” cannot pose risks to the system. The regulator’s crackdown on Paytm Payments Bank because of inadequate know-your-customer (KYC) compliance, is simply a reminder that fintechs must observe the rules.
Some of the suggestions put forward by fintechs during their meeting with the finance minister on Tuesday are reasonable. For example, it’s possible that the KYC process is onerous and needs to be eased. In fact, the finance ministry has already agreed to review this. Fintechs have also asked for low-cost funding that can be on-lent to small borrowers such as small companies. That’s a reasonable ask, which should be considered by banks. However, one is not sure why fintechs asked for easing the listing process.
After all, they are merely financial entities and must comply with the market regulator’s rules for listing. In fact, the regulator’s decision to waive the three-year profitability criteria for start-ups was a case of misplaced priorities. If anything, the listing rules for need to be tightened. If some of them wish to list overseas because the rules in India are too onerous, they are welcome to do so. Consider what has happened to the share price of One97 Communications whose shares were sold to investors at `2,150 apiece. The stock is currently trading at a fifth of its value; at one point of time, it was trading at `318.
The fact is that many fintechs, in their quest for quick profits, act in a cavalier fashion. If the Reserve Bank of India (RBI) has been tightening the rules for digital lending, it is because many of them they were ‘borrowing’ the balance sheets of banks and non-banking finance companies and exploiting the loopholes. In June, 2022 it disallowed the loading or reloading of prepaid instruments (PPIs) such as cards and wallets, with credit lines, by mainly non-bank PPIs. This was essentially because the fintechs were piggybacking on banks. Worryingly, most of the exposure belonged to just two banks, one of them a very weak one. Again, very often loan disbursals and repayments were not being routed via the customers’ accounts as they should have been. This is clearly a risk since the lending system would be left unaware of the leverage of customers as would the credit bureaus. Since fintechs were partnering with several NBFCs, they were pooling the funds and enjoying the float. Also, the customer’s credit limit was being raised without her consent.
Fintechs were miffed when the RBI clamped down on FLDG—first loss default guarantee—restricting the amount to 5% of the loan portfolio and disallowing corporate guarantees from being issued. FLDGs ensure fintechs have skin in the game but if they go bust, the lender would be left with the losses especially since guarantees averaged 35%. One cannot expect the regulator to ignore such malpractices. Fintechs are welcome to be a part of the financial system, but they must not try to game it.