Tuesday 28 June 2022
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Why fintech companies must be regulated

Banks that have large credit card portfolios may gain if the RBI continues to toughen its stand against fintech companies and discourages them from availing of NBFC money

In a bid to rein in lending activity by financial technology (fintech) companies via non-banking financial companies (NBFCs), the Reserve Bank of India (RBI) has said it will not permit non-bank pre-paid instruments (PPI) to be loaded through credit lines. Concerns of systemic risk build-up must have led to this decision. The central bank observed that several fintech companies have acquired nearly 3 lakh cards using PPI licences and they have been loading the wallets of consumers using credit lines from NBFCs and banks.

The fintech companies are utilising PPI licences to disburse loans rather than to route payments, which is a disturbing development according to the RBI. Furthermore, these companies are using NBFC money to load consumer wallets, which is not how the financial system must work according to the central bank. Curiously though, the RBI is not disturbed by the fact that credit and debit cards are loading the wallets.

In November 2020, Rajeshwar Rao, deputy governor in charge of banking and risk monitoring at the RBI, had said NBFCs must convert themselves into tightly regulated banks or scale down operations. The next month, the RBI cautioned against applying for loans using unauthorised digital platforms and mobile applications that promised quick and hassle-free processes — amid a major instant loan app scam surfacing in the country with its multi-city network. With such crises in recent times, the concern is justified.

The new RBI is likely to affect brands like Slice and Unicards.

Banks that have large credit card portfolios may gain if the RBI continues to toughen its stand against fintech companies and discourages them from availing of NBFC money.

NBFCs may need to route funds via banks if RBI objects only to the loading of NBFC credit lines onto wallets but is okay with the loading of bank credit. There may be customers who use a line of credit through their wallets inadvertently. Such circuitous lending has clearly not gone down well with the RBI. While the amounts loaded onto the wallets may be small, the central bank is clearly worried about systemic risk.

Industry insiders say some wallets have been offering their services to NBFCs to ease disbursements of loans, personal loans and microfinance loans to reduce the usage of cash. App-based credit card providers who use wallets to issue credit lines pay lenders a fee and earn an interchange of 1.5%.

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