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RBI draws the line: Fintechs must innovate without resorting to regulatory arbitrage

Experts have pointed out that there is a thin line between an underlying credit line available on a credit card and a running credit line from a lender. That may be so, but RBI is making a distinction between the two, possibly because it believes there is little or no due diligence being done in the latter case.

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The regulator seems to prefer a construct where the underlying lender issues a credit card by tying up with a credit card network.

The Reserve Bank of India’s (RBI’s) concerns that fintechs are ‘borrowing balance sheets” when they load pre-paid instruments (PPIs) with lines of credit are well-founded. Early last week, the central bank reiterated that non-bank PPIs should be loaded only via cash, debiting a bank account, debit and credit cards. Essentially, RBI was reminding new-age financial players that offering a line of credit requires a licence. Experts have pointed out that there is a thin line between an underlying credit line available on a credit card and a running credit line from a lender. That may be so, but RBI is making a distinction between the two, possibly because it believes there is little or no due diligence being done in the latter case.

The regulator seems to prefer a construct where the underlying lender issues a credit card by tying up with a credit card network. Else, products are being created with some confusion on which party owns the customer and who is responsible for ensuring data security and privacy. It is true that fintechs, with their state-of-the-art technology and analytical prowess, are reaching out to sections of borrowers that do not have access to formal credit. But they need to innovate without resorting to regulatory arbitrage. Building in credit elements into products, by sourcing the funds from banks and non banking financial companies (NBFCs) and delivering these through PPIs, can put the financial system at risk. That’s because of the absence, or near absence, of due diligence by the ultimate lenders or the banks and NBFCs.

The amounts that have been disbursed in this manner may be small but by one estimate, some new generation players have been adding 200,000-300,000 cards using PPI licences and loading the wallets of consumers. Given the popularity of these products, it won’t take long for the numbers to grow. Also, the banks that some fintechs have been piggybacking on are relatively small. It wouldn’t come as a surprise if the regulator puts in place some prudential lending limits for PPI-based lending or even bars them altogether.

To be sure, fintechs will be miffed as some products would need to taken off the shelves; one casualty could be the popular BNPL (buy-now-pay-later), if these have been structured as a line of credit and the funds sourced from banks or NBFCs. At best, they could be given time to unwind the credit lines. However, the fact is that banks today are keen to partner with fintechs, as it gives them access to a larger customer base. To that extent, they should be able design products that benefit both categories of lenders. The reminder on PPIs, together with the RBI Governor Shaktikanta Das’ comments on digital licences, have created an impression that the regulator isn’t too keen on fintechs.

To be sure, Governor Das said recently that while it is the regulator’s responsibility to keep track of the leverage building up in the system and to assess if it could pose a challenge, it does not wish to kill some of the new business and models. While that sounds encouraging, RBI can be expected to be very conservative in its approach to new-age financial players. The light–touch regulation, seen so far, could soon become more stringent. Indeed, that even legacy banks may not be allowed to set up digital banks, suggests the regulator is going to play it very cautiously.

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