Banks and non-banking financial companies (NBFCs) are intrinsic to our financial lives, not just for day-to-day transactions but also because they help us fulfil various needs through loans. Over the past few years, fintech companies, too, have gained importance in terms of providing smooth financial services through digital channels like apps.
Just like other areas of the financial sector, the banking and fintech industries need to move forward. Resolution of certain key issues, ease of transaction and room for innovation are areas that can help the cause, and the newly elected government can give the much-needed nudge to regulators to facilitate all of that.
For the banking sector, experts emphasize on the need to resolve the problem of non-performing assets (NPAs) of banks. Madan Sabnavis, chief economist, Care Ratings, said that there has to be a clear cut policy for NPA resolution. “I am referring to the 12 February circular by the Reserve Bank of India (RBI) which was quashed by the Supreme Court. We need to have clarity about what should be the approach once we get into resolution of NPAs. So the new government should do this by working with RBI to make sure a solution is provided," he said.
Another aspect for banks is getting public sector banks that have been put under prompt corrective action (PCA) by RBI out of it. Under PCA, RBI restricts banks from giving riskier loans. “RBI has the draft code to say that when you come under PCA, it is because you are fundamentally weak. So the government’s job is to address the issues of banks directly because the government owns these banks. So if capital is required, you’ll need to take a call on whether I should provide capital," he said.
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The government, along with RBI, will have to work on providing liquidity to NBFCs, including housing finance companies and those fuelling consumer durable financing, which have been facing crisis for the last six months.
“If we look at NBFCs, there is no problem in terms of assets. We have very good quality assets. The NPA levels are very low. The problem appears to be more in terms of liquidity," Sabnavis said. Currently, what is being done through RBI is essentially enabling banks to lend money to NBFCs, which is good enough but it is not adequate and it has not managed to cure the crisis that started from July-August 2018, he said.
“Now whether RBI wants to provide some kind of facility or if there is going to be some guarantees which are provided by the government or by any other entity needs to be worked out," he said.
The rapid adoption of fintech services among consumers was on the back of eKYC through Aadhaar, which stopped after the Supreme Court judgment in September last year. Akhil Handa, head, fintech, partnerships and mobile banking, Bank of Baroda, said the issue around the use of Aadhaar needs to be sorted out on an urgent basis, and it will require statutory backing. This is important because Aadhaar-based systems were also being used for e-mandates and e-signatures.
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Vivek Belgavi, partner at PwC India said that the government has taken the ordinance route to enable use of Aadhaar for subsidy payments. “UIDAI (Unique Identification Authority of India) is also working on some offline Aadhaar authentication system, which will be in line with the Supreme Court judgment on Aadhaar. The government now needs to enable a process of onboarding customers digitally for businesses (eKYC) which can keep costs in check. Otherwise, onboarding customers itself becomes a costly affair for fintech businesses," he said.
The other areas that need work are harmonization of rules across different regulators and easing and deepening of digital payments, Belgavi said. Consent-based use of data is also an area that needs to be worked upon, Handa said.
The introduction of the regulatory sandbox approach to fuel innovation in fintech has been welcomed by experts and the financial services sector. However, with different regulators coming out with different guidelines, there is a sense of confusion. This can increase compliance requirements for fintech companies that need to comply with more than one regulator.