We are well placed to let fintech lead the success of Digital India
4 min read 27 Jul 2022, 11:30 PM ISTWell balanced innovation and regulation can convert an electronic head start into economic growth
PremiumFrom a 6.6% contraction in 2020-21, the Indian economy recorded a sharp rebound of 8.7% growth in 2021-22, by provisional estimates. The International Monetary Fund’s World Economic Outlook suggests that India shall become a $5 trillion economy by 2026-27. This growth is attributed in large part to the exponential growth expected in digital infrastructure for services, especially financial.
The rise in digital adoption during the pandemic has made India a trailblazer of the fintech revolution for developing as well as developed nations. The Niti Aayog report, India’s Booming Gig and Platform Economy, has underscored the role of fintech and a regulatory sandbox regime in helping India achieve its $5 trillion target. The same was previously highlighted by the 2019 annual report of the Union ministry of electronics and information technology. It mentions that India has a potential to create over $1 trillion in economic value from the digital economy, including services.
The finance ministry too maintains that the Indian fintech market shall reach about $160 billion by 2025. According to a recent report of 2022 by BLinc Invest, our fintech market is the world’s third largest already.
Digital financial services have become a key driver of credit disbursement via digital platforms. This baseline success could be attributed to the Jan Dhan-Aadhaar-Mobile (JAM) trinity revolution, which acted as the foundation of credit accessibility and direct benefit transfers. It enabled the penetration of under-banked and unserved segments of our vast market that brick-and-mortar banks failed to reach. It provided transparency, thanks to its adaptability, multilingual options of access and robust interface, leading to an expansion of the country’s consumer base. In addition to easing friction between financial institutions and retail customers, it has also drawn capital flows into the Indian economy.
Further, fintech firms have played an important role in bridging the gender and accessibility gap in financial services. They helped meet challenges arising from restrictions on the in-person mobility of women and loss of employment at a time of financial distress owing to covid. The ease of signing up, making transactions and obtaining credit offered by fintech services only added to the many reasons that their cash-free model resonated with a consumer base of women. Thus, fintech firms have aided businesses as well as individuals.
One of this decade’s recent prodigious initiatives would be the modern fintech hub that is being set up in Gift City, Gujarat. Moreover, the Indian market has witnessed an upward trend in fintech unicorn and soonicorn valuations. This is an outcome of the regulatory sandbox regime introduced by the Reserve Bank of India (RBI) in 2019 that has helped pave the way to the El Dorado of a $5 trillion economy.
Nonetheless, some lacunae and loopholes in regulating fintech undeniably exist. The multifold disruption of technology makes it hard for policymakers to keep up with the curation of laws. Innovators, on their part, must not compromise security while enhancing services. It is thus imperative for the regulator to put in place reasonable restrictions where data protection, privacy and security may be at threat. So far, the regulations have been ‘light touch’, aimed at reducing risks arising from the fintech industry. Key examples would be licensing of payment aggregators and the regulation of payments data and digital lending. It is important for the regulator to strike a balance between product innovation and consumer protection.
Broadly, the fintech sector is regulated under five regulations: (i) the Payments and Settlement Systems Act of 2007; (ii) Peer-to-peer lending guidelines of 2017; (iii) National Payments Corporation of India regulations for payments via the Unified Payments Interface (UPI); (iv) Regulations governing NBFCs under the RBI Act of 1934; and (v) Regulations governing payment banks under the Banking Regulations Act of 1949.
Also note that RBI set up an internal fintech department in January 2022. This has been constituted in a bid to promote orderly growth in the country’s digital financial services sector, identify issues and challenges, facilitate constructive innovation, boost incubation, and regulate the fintech industry for its smooth working. These developments are an outcome of RBI’s financial inclusion agenda. In addition, the regulator has rolled out a number of favourable policies for credit facilitators like small finance banks and payment banks. This has fast-tracked the usage of UPI, internet-based banking and mobile banking. As stated by commerce minister Piyush Goyal last year, India’s fintech adoption rate is 87%, as against the global average of 64%, second only to China.
It’s fascinating. An industry barely older than a decade is aiding the Indian economy through a phase of Knightian uncertainties emerging from a pandemic and the war n Europe. From the launch of Digital India and Atal Innovation Mission to our financial inclusion manifesto, a confluence of banktech, insurtech and wealthtech is ushering in the Fourth Industrial Revolution. What began as a financial inclusion agenda has been scaled up by digital tools that can help achieve not just that, but much more in terms of an economic boost.
Trisha Shreyashi & Krishna Pardeshi are, respectively, a legal professional and panellist at HBR, and a law officer at a REIT.
