RBI’s clarification that prepaid payment instruments (PPI) – a licensing category that includes e-wallet Operators in India – can only be loaded through cash, bank accounts and credit cards issued by regulated entities, does not preclude digital finance platforms from offering loans backed by banks and other non-bank financial companies.
However, this restricted certain business models under which PPI operators took on customer credit risk by effectively increasing unsecured personal credit, for example with ‘buy now pay later’ schemes and ‘quasi-credit cards’. Through, the rating agency said.
“The clarification could affect the business plans of many fintech firms that offer PPIs, including mainstream operators,” Fitch said. “However, more established and sophisticated companies will benefit in the long term if tighter regulation encourages the exit of less honest firms from the sector.”
Fitch-rated financial institutions that lend via digital platforms are unlikely to be affected by their recent explanation, as their digital lending tie-ups remain small, although future regulation may reflect changes in their emerging digital strategies. can indicate.
Fitch said greater fintech regulation is likely over the next 12-24 months, reflecting the sector’s growing presence in the financial system.
According to estimates by Worldpay (part of FIS), mobile wallets accounted for 25% of all point-of-sale payments in India in 2021, up from only 5% in 2019.
An RBI working group on digital lending estimated that there were about 1,100 apps offering loan products in the country in 2021, with around 600 illegal loan apps – although Fitch believes digital lending currently accounts for the total The system is small relative to credit.
According to the rating agency, “Indian regulators are generally keen to encourage innovation in digital financial services.” “Nevertheless, their attention is turning to safeguards to prevent risks from migrating to more lightly regulated areas of the financial system.”
The RBI Working Group presented a number of recommendations for a digital-lending regulatory framework in late 2021. Regulatory issues highlighted include licensing and oversight, customer suitability and education, data protection, consumer leverage, and credit and enterprise risk management – reflecting the regulatory priorities identified. other jurisdiction.
In most cases, Fitch expects the RBI’s strategy to regulate fintechs for similar financial products and services – largely those with similar risks – to be governed by consistent regulatory principles, including any prudential requirements. This approach should reduce the potential for regulatory arbitrage between firms, and enable proper oversight by the relevant financial regulators.
“Enforcement is likely to be a major challenge in light of the proliferation of unlicensed lenders and limited resources among regulators,” Fitch said. “The large number of fintech enterprises and the short record of the sector can also make it difficult for consumers to differentiate between legitimate and disputed operators, regardless of the licensing regime in place.”