On 5th March 2018, GOI constituted a Steering Committee on Fintech related issues which has now come up with its recommendations. It was comprised of Secretaries of different ministries and headed by the Secretary of Economic Affairs (DEA) , Mr Subhash Chandra Garg.
The objective of the committee was to “Consider various issues relating to development of Fintech space in India with a view to make Fintech related regulations more flexible and generate enhanced entrepreneurship in an area where India has distinctive comparative strengths vi a vis emerging economies”.
We look at the salient features of the recommendations as briefly indicated below.
- The committee recommends the use of fintech, especially by PSE financial service companies to bolster cybersecurity, fraud control and anti-money laundering. The Committee also recommends that fintech firms specialising in this field should be encouraged to set up their businesses in India and provided necessary regulatory approvals for expanding their services in the country.
- The Committee recommends that the Ministry of Finance may develop a marketplace model of debt financing in India by reforming the present model of P2P lending platforms. Potential hindrance in terms of restrictions on overall and individual exposure limits may be reviewed and options like allowing Mudra Bank to directly fund or co-fund SMEs and MSMEs through P2P platforms may also be examined as an alternative credit delivery channel.
- The Committee recommends that DFS and RBI may examine the suitability of ‘virtual banking system’ in the Indian context, costs and benefits regarding allowing virtual banks and prepare for a possible future scenario where banks do not need to set up branches and yet deliver the full scale retail banking services ranging from extending loans, savings accounts, issuing cards and offering payment services through their app or website.
- For facilitating KYC by Fintech industry, the Committee recommends that various options, including possibility of Video-based KYC, making available validated electronic versions of KYC related documents through DigiLocker, making these available for verification by service providers with prior customer consent, etc., may be considered early.
- In order to increase access to credit and to stabilise the growth of such practices and keeping in view recommendations of the Justice Srikrishna
- A Taskforce has been recommended to be set up with the participation of the regulators and make suitable recommendations to safeguard the interests of Consumers, while also enabling a positive climate for innovation.
- The Committee notes that the poor and the unbanked are often unable to access credit due to the lack of formal credit history and non-availability of other relevant documents. Fintech companies focus on a number of unconventional sources of data and advanced data analytics to create better credit profiles of such individuals. These fintech companies collect information pertaining to social media behaviour, financial transaction behaviour, product purchase behaviour etc. These kinds of information are not captured by CICs. Fintech companies collect these kinds of information from the mobile phones of consumers with prior consent. Banks are being encouraged to explore the possibility of establishing new alliances with players like fintech companies for ease of loan sanctioning process enabled by new technologies. In order to increase access to credit and to stabilise the growth of such practices and keeping in view recommendations of the Justice Srikrishna Committee, this Committee recommends that MeitY and TRAI may formulate a policy to enable such practices through a formal, consent-based mechanism.
- Centers of Excellence for FINTECH are recommended to be set up in 2 or 3 premier National institutions like IITs/NITs and Government Financial sector institutions like IDRBT/NIBM/NIFM
- The Committee recommends that the Ministry of MSME should work with DFS and RBI for testing and implementing block-chain solutions in trade finance for MSMEs in public sector banks as well.
- The Committee recommends that the Government takes up modernisation and standardisation of land records in the country on a war footing with a deadline to complete such a system in the country in a period of three years. For this purpose, a steering committee comprising of Department of Economic Affairs, Department of Financial Services, Ministry of Agriculture, Ministry of Rural Development, Department of Land Resources and MEITY with involvement of State Land and Registration departments should be constituted to draw up a blueprint for doing so.
- The Committee recommends review by Department of Legal Affairs of all such legal processes that have a bearing on financial services and consider amendments permitting digital alternatives in cases such as power-of-attorney, trust deeds, wills, negotiable instrument, other than a cheque, any other testamentary disposition, any contract for the sale or conveyance of immovable property or any interest in such property, etc., (where IT Act is not applicable), compatible with electronic service delivery by financial service providers.
- The Committee recommends that MEITY coordinate the process of identification of the datasets that can be shared through open APIs, setting targets for the creation of such APIs by the relevant Ministries while enabling and supporting Central, State and Local governments to create relevant open APIs. The Committee also recommends that greater nudge from all regulators combined with development of open API eco system will enable account aggregator services to take off.
- Regulators should establish prudential regulations for fintech to enable the moderate and high impact scenarios of fintech development to emerge.
- The Committee recommends that RBI may consider making available banking data (such as transaction and account history data) for use by the financial sector, including fintech firms, (based on consumer consent and with other appropriate safeguards) through APIs. It also recommends that all financial sector regulators study the potential of open data access among their respective regulated entities, for enhancing competition in the provision of financial services.
- It therefore recommends that all financial sector regulators fix deadlines for on-boarding existing KYC data to the Central KYC registry and make C-KYC (central KYC) fully operational and make KYC a digital and paperless process. At least the KYC data from the time the concept of Officially Valid Documents was introduced vide PML rules should be uploaded. In respect of legacy accounts, data may be uploaded by banks during the process of re-KYC.
- The Committee recommends that a legal framework for consumer protection be put in place early keeping mind the rise of fintech and digital services. It further recommends enacting such a law early keeping the rise of financial technologies in view.
- The Committee recommends creating a common digital platform for all micro-pension schemes and Government pension schemes, including EPF, through which pension subscribers can subscribe to specific schemes seamlessly and reduce access barriers by allowing payments through various modes such as Jan Dhan Yojana accounts, debit card, credit card, internet banking, mobile wallets etc.
- In order to expand the reach of small savings schemes, provide ease of access and transactions to consumers, reduce risk of frauds, enable trading in secondary markets, etc., the Committee also recommends that all Small Savings Products, which are neither accessible online nor available in demat form, should be brought on a common online platform in demat form. For vulnerable groups and weaker sections who are neither digitally and financially literate, a combination of both human interface and technological application may be effective.
- The Committee recommends use of fintech by Public sector commercial banks to enhance credit scoring, follow up of repayments, predictive analytics, etc., so as to enable reduction of NPAs in this space.
A rough glance at the above indicate that the recommendations indicate several new business opportunities which can be explored by the industry. However, most recommendations need to be carefully evaluated for the risks before they are actually implemented.
A lot more discussion is required on the recommendations.