By Prabal Goel, Chief Compliance Officer – Business & Legal In recent years, the financial technology (fintech) sector has seen exponential growth, revolutionizing the way we conduct financial transactions and manage our money. However, with innovation comes the need for regulation to ensure consumer protection, financial stability, and market integrity. In India, the Reserve Bank of India (RBI) plays a pivotal role in overseeing the fintech industry, setting guidelines and regulations to promote a safe and efficient ecosystem. Compliance with RBI’s guidelines is essential for fintech firms to thrive in this rapidly evolving landscape. RBI’s regulatory framework for fintech encompasses various aspects, including licensing, data protection, outsourcing, KYC, digital lending and customer due diligence. In recent years, RBI has been increasingly vigilant in assessing the compliance of fintechs with the regulations issued by RBI and has been proactive in taking measures to tackle non-compliance. RBI regulates fintechs through a variety of instruments, including by use of Regulations (both statutory and non-statutory), Circulars (including Master Circulars), Circular Letters, Directions (including Master Directions), Guidelines, Policy Statements, Guidance Notes, Press Releases, Standards, Mailbox clarifications, Advisories, D.O. Letters, and General Instructions. A lot of these regulations govern certain types of fintechs directly; examples of these regulations would be NBFC – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 which governs P2P lending platforms. Sometimes, RBI regulates indirectly by regulating the banks and NBFCs associated with them. We see this in operation in the case of Directions on Managing Risks and Code of Conduct in Outsourcing of Financial Services by NBFCs, whereby RBI governs the party outsources any activities, generally performed by itself, to some other party. RBI also constituted Regulations Review Authority 2.0 in 2021 in order to enable ease of compliance. This demonstrates an active push to ensure that the RBI is a step ahead of the curve to facilitate orderly growth of the banking and finance sector without curbing innovation. On the other hand, RBI has becoming increasingly tight in ensuring consumer due diligence and ensuring that the regulated entities follow RBI KYC norms scrupulously. Increasingly, RBI has reiterated its commitment towards ensuring no tolerance towards persistent non-compliance with its norms. Achieving and maintaining compliance with RBI’s regulatory guidelines can, sometimes, be a complex and challenging task for fintech firms, especially for startups and smaller players with limited resources and expertise and more particularly, in a business environment where the governance has, regrettably, had a history of prioritizing business revenues and efficiency ahead of compliance. To navigate the regulatory landscape effectively, fintech companies must invest in robust compliance frameworks, engage with regulatory authorities, and stay abreast of regulatory developments and updates. It is in this light that RegTech or the technology which makes regulatory compliance more efficient through automated processes and lowers the costs of compliance, acquires lot of currency. It is anticipated that in coming years, RegTech would assume a vital role in the operations of several fintechs. The key drivers of RegTech have been and are expected to be technologies based around cloud computing, Big Data, API and most importantly, blockchain. The biggest roadblock to wider adoption of RegTech is the competencies around knowledge of the regulatory requirements. It is often seen that especially in case of regulatory interpretation, there are often ambiguities and despite the adoption of best drafting practices, even contradictions between regulations. In a business environment driven by startups with less than ideal compliance culture, reliance on RegTech, particularly cheap RegTech, can be disastrous, since such RegTechs may often have skimped on developing the regulatory knowhow. Again, a RegTech which provides solutions tempered by several qualifications about its capabilities, may not really be solving modern fintech regulatory compliance problems. Nevertheless, RegTech has the potential in standardized environments, which is reflected in the projected jump to the tune of 4 times its current valuation by 2028- the valuation of the industry, by some estimates, in 2023 is $1.37 billion in 2023 and is expected to swell to $6.64 billion by 2028. Whether this projected increase is ever achieved will be a question that time will answer, but one thing is certain- the success of RegTech as a method to achieve compliance will be determined by the agility of RegTech to keep pace with the ever-changing regulatory requirements.
Tag: business
The Impact of Fintech on Small Business Financing: Opportunities and Challenges
Fintech has disrupted the traditional lending landscape, making it easier for small businesses to access funding and increasing competition among lenders. According to Business World, statistics show that SMEs have contributed to the employment of over 9.4 million people and account for 30% of the nation’s GDP. Small businesses have grown significantly, but it has come at a price. Many SMEs currently face significant difficulties as a result of financial issues or perhaps a lack of resources. SMEs must improve if they hope to beat the 10% growth rate of prior years. Following are some of the ways in which Fintech has had a significant impact on Small business financing: Increased access to capital Fintech has increased the funding choices available to small businesses compared to the past and made it simpler for them to obtain capital. By lowering the friction in the financing process, fintech enables small businesses to apply for and get loans more quickly. Flexibility to withstand adversities Fintech lenders frequently provide loan terms that are more flexible than those offered by traditional banks, such as shorter loan terms, lower minimum loan amounts, competitive interest rates, and individualized payback plans. Small firms that require specialized financing may benefit from this since they may not meet the major banks’ standard lending requirements. Elimination of extra overhead expenses One of the critical benefits of fintech is that it reduces unnecessary administrative expenses and aids small firms in cost-cutting. Opportunities in SME lending : Personalized Financing Solutions Fintech lenders frequently utilize data analytics and algorithms to determine credit worthiness, which enables them to offer small firms more specialized funding options. This may lead to loans that more closely match the company’s demands and its particular financial circumstances. Governmental Initiatives Along with providing automatic foreign direct investment, the government has launched a number of other programmes and initiatives. These programmes include, among others, Stand-up India, the Growth Capital and Equity Assistance Scheme, and MSME Business Loans in 59 Minutes. Challenges in SME lending : Insufficient knowledge There are still certain gaps in people’s understanding or awareness of SME loans in the fast-paced world of today. Many people still trust traditional banks despite the rising demand, but this obstacle is considered a chance for growth, and as facilities increase, everyone will undoubtedly adjust to these advancements. Conclusion Fintech is positioned to transform every industry, from promoting digital lending to encouraging a cashless society. However, before making a choice, small businesses must carefully weigh the advantages and drawbacks of partnering with a fintech lender. Despite the challenges associated with Fintech adoption, its advantages and innovation should not be disregarded. In the upcoming years, it will continue to influence the lending environment for SMEs.
Growth Of Retail Lending and Its Impact on Underserved Segments
Retail lending has grown significantly over time as a result of technological improvements, changing consumer behaviour, and increasing regulatory frameworks. While this expansion has given customers many choices, it has also significantly impacted small enterprises. In a collaborative analysis from CRISIL and ICICI Bank, it is predicted that retail lending will increase by $96 trillion by 2024. The banking industry had to step up its game in light of the COVID-19 pandemic and the surge of digital innovations. Retail lending has advanced significantly, from mobile applications to electronic payments. Retail lending solutions have been acknowledged as a cornerstone for a bank to build a long-term relationship with its consumers. Lenders have the opportunity to interact with borrowers and create enduring bonds when they engage in loan transactions. The growth in the retail lending sector has been driven by several factors, including low-interest rates, increased access to credit, and a growing population of consumers. In recent years, online and digital platforms have also made it easier for consumers to apply for and receive loans, further fueling growth in the retail lending market. Additionally, the rise of fintech companies has contributed to the growth of retail lending as they offer alternative lending options to traditional banks. Retail loans formed about one-third of the total banking system’s gross advances. It is important to know that the composition of secured and unsecured advances has changed between 2021-2023, with unsecured retail loans increasing from 22.9 percent to 25.2 percent. However, one can question if retail lending is gaining traction for small firms. 80% of all industrial organizations are small firms. Following is a list of the growing retail lending market’s impacts on underserved segments. Increased consumer spending Consumers may have more disposable income to give to small businesses as a result of taking out additional loans. Consequently, this will enhance small firms’ income and sales. Improved access to credit Small businesses may find it simpler to obtain the funding they need to grow and expand thanks to an increasing variety of retail lending choices. For instance, up until 2019–20, retail credit increased by 16.6% year over year (YoY). Forecasts indicate that retail lending will expand more slowly than it did prior to the epidemic. Increased competition The expansion of retail lending may also lead to increased competition among lenders, which could lead to lower interest rates and better loan terms for small firms. Fintech companies Due to the growth of retail lending, fintech businesses can provide alternatives to traditional banks. They can provide easier-to-approve funding solutions that are more accessible, particularly for small enterprises. Boost to the economy Retail lending can help create jobs and boost economic activity, in addition to promoting economic growth, by giving consumers and small businesses the money they require to purchase products and services. For instance, the number of loans granted for agricultural and allied operations jumped from 2.4% in June 2020 to 11.4% in June 2021. Digitization Small companies gain from adopting a digital-first strategy by taking advantage of the automation of retail financing and the transition from a more traditional approach to one that is more digitized. With the use of fintech, the retail loan process can be digitized, and by digitizing the customer journey, operational efficiency can be raised by 20 to 30%. Conclusion The effects of expanding retail lending on small firms could, however, alter depending on how the market is doing at any given time. One may need to be educated about these changes in order to make judgments as a small business owner. Small businesses have been greatly influenced by the expansion of the retail lending environment, whether due to automation or greater demand.
Micro-lending changing the Rural landscape
The origination of the micro-lending industry in India dates back to the 1980s when India took inspiration from Bangladesh’s successful reforms where they benefitted from distributing loans to the underprivileged women of their region. What began as an experiment, quickly turned into something substantial for India. Today, India’s micro-lending portfolio stands at Rs 2.93 Lakh crore with 6 crore unique borrowers and shows a further growth of 23.5% yearly. With a loan portfolio worth Rs 2.93 lakh crore, the microfinance industry grew by over 16 times in the last 10 years. Majorly served by 202 businesses, roughly over 130 million Indian households, i.e., one-third of the population have access to microfinance as per NABARD’s Status of Microfinance in India report for 2020-2021. Over the years, the success of micro-financing has witnessed a visible shift from banks to NBFCs. According to Sa-Dhan – an association of the Micro-Finance Institutions (MFIs), the NBFC sector is currently dominating with a usage share of 37.53% while banks take a 36.18% slice of the pie, giving away the remainder to other institutions. The total portfolio size of NBFC- MFIs has grown nearly by 7% quarter-on-quarter and amounted to Rs 1,01,678 crore as on September 2022. Inquiring deeper, as per Microfinance Institutions Network, NBFC-MFIs have 22% of their portfolio in urban India and 78% in rural. What has been the micro-lending threat in Rural India Small business owners and merchants, especially ones residing in rural India were often left underserved by the mainstream financial institutions given the high-risk quotient they bring with them. High operational costs coupled with the threat of fraud, defaults and NPAs often left banks in a grey area on how to service the said market. Moreover, Regional Rural Banks (RRBs) that service the rural market often face trouble with inadequate finance since they depend on NABARD to collect finance for their further operation. Given that rural households often have low capital income and hence, collecting deposits to raise funds has been the root cause of this entire fiasco. Rural households largely depend on natural resources like agriculture and other rural economic activities for their survival therefore, natural calamities and other natural menaces play a big role in the success of their business cycle. However, reimagining a way with lower operating and market costs by financial institutions has ensured an improved lifestyle for many rural households. It has further led to the growth of the said sector. Micro-lending changing the landscape Micro-loans are distributed by a range of institutional channels– Scheduled commercial banks (including small finance banks and regional rural banks) Cooperative banks Non-banking financial companies Microfinance institutions However, NBFCs hold a major chunk of this market followed by banks and other micro-finance institutions. A combined amount of Rs 45,830 crore in the form of micro-loans was disbursed in the quarter ending December 2022. Micro-lending institutions are expanding their services by introducing other financial services like insurance, remittance, AePS, etc. while providing training and assistance to the unversed. As for the market leaders; NBFCs have introduced a new technology that enables borrowers to make daily repayments against their loans called Equated Daily Instalments. They have also introduced PoS devices, apps, etc. to allow small businesses to benefit from digital payment methods. Despite a myriad of services already designed for small businesses, financial institutions still have a great scope of work in the said segment. With the MSME sector offering 111 million job opportunities and contributing to close to 30% of the nation’s GDP, there’s still a credit gap of $397 billion; a sizeable opportunity for financial institutions. With the RBI’s new guideline published on March 14, 2022, where they have notched up their support, micro-loans have been defined as collateral-free loans to a household comprising husband, wife and unmarried children and with a yearly income of up to Rs 3 lakh (revised from Rs 2 lakh for urban areas and Rs 1.6 lakh for rural areas earlier). The new rules also lift the price cap on interest rates to ensure that all microlenders are brought on common ground. Where rural households with small businesses struggled to avail basic amenities are today given access to a range of financial services allowing them to attain financial freedom. Micro-lending is changing the rural landscape by offering households the finance they require to build themselves. Although the service is still in its embryonic stage with a wide gap to fill, it can widen its audience range and promote inclusivity in the long run.
Introducing Supply Chain Finance
Supply Chain Finance (SCF) is a technology solution that lowers financing costs for buyers and sellers. It tracks invoice approval and settlement and automates transactions to improve the efficiency of all the parties involved in a sales transaction. The supply chain financing market is expected to reach a CAGR of 17.1% by 2024. According to Mckinsey reports, SCF eligibility will increase from less than 40% to as much as 80% in the upcoming years as supply chain leaders are looking for better solutions. By 2031, the supply chain finance market is expected to reach $13.4 billion. Indian Supply Chain Financing Ecosystem Challenges Compared to global trends, India’s supply chain financing (SCF) is still nascent. Indian MSMEs employ more than 11 crore people and contribute 29% of the GDP. Also, 70% of MSMEs require working capital funds. However, SCF remains inaccessible due to the legacy banking systems. Many MSMEs don’t meet the banking requirements criteria. The estimated credit gap is Rs. 20-25 trillion. This credit gap forces the MSMEs to approach third-party lenders, which results in higher costs, stunted growth, low profitability, and a volatile business model. The COVID economic disruption doesn’t help either. The low-cost SCF option provides extended financing for MSMEs and helps lenders manage credit risks. Source: Allied Market Research According to the new Factoring Regulations Act 2011, more than 182 NBFCs can now offer factoring services. Previously, NBFCs could meet only 20% of the funding requirements for MSMEs. Digitisation Is Paramount To SCF Innovation Digitisation is the key to achieving seamless SCF solutions for Indian MSMEs. Businesses will have access to more customised SCF products that help increase the working capital. Apart from invoices, businesses can benefit from other fintech offerings such as a letter of credit, import and import bills, shipping guarantees, performance bonds, and more. Technology innovations such as fintech digital delivery, industry utilities, API technologies, and blockchain bring supply chain financing closer to SMEs. With the non-availability of credit history, lenders can use AI-based risk assessment solutions to evaluate creditworthiness. Such solutions also predict business growth, enabling lenders to offer SCF financing. Source: PWC Fintechs can bring about innovation in SCF solutions in the following ways: Incorporate API-enabled services using a customer-centric tech stack. Use data to understand supply chain networks to innovate new opportunities. Use blockchain-distributed ledgers to improve the transparency of the financing platform. Introduce innovative products such as CAPEX discounting, invoice discounting, warehouse receipt finance, dynamic discounting, early cycle discounting, and SCF securitisation. Various initiatives from the Government of India encourage SCF. The fintech platforms can use the existing rails to improve their SCF offerings in the following ways: Leverage TReDS and GSTN linking to understand MSME cash flows for invoice financing better. Use the AA framework to provide financing options for suppliers and buyers. India’s addressable supply chain market is estimated to be Rs. 60,000 crores, while the total market value is Rs. 18 lakh crore. Digital supply chain solutions facilitate fully trackable transactions to seamless trading between buyers and suppliers.