Digital banking: RBI weighs a regulatory system

Mumbai: India’s burgeoning digital banking ecosystem could soon come within a more formalised regulatory and supervisory mandate specified by the central bank as the regulator looks to accommodate roles for entities beyond conventional banks and non-banking finance companies (NBFCs).An internal team at the Reserve Bank of India (RBI) is studying the scope of various classes of digital intermediaries functioning at the interface of India’s technology and financial industries. It is seeking to provide definitions to these emerging entities and listing down compliance yardsticks, three industry sources briefed on the matter told ET.These entities include fintechs aspiring to be lenders but don’t want to be a bank, service providers embedded with banks, and Application Programming Interface (API) banking entities, which in some western markets are known as ‘neo banks.’ the industry sources said.The RBI didn't respond to ET’s queries.Discussions are still at an early stage and the RBI is yet to officially set up a committee or a working group. But one of the sources cited above told ET that senior officials within the RBI are initially considering a ‘light-touch’ regulatory approach that could see these emerging entities being subject to operational guidelines. Some regulations may be made enforceable by the licensed lenders with whom the fintechs partner for banking services.The RBI already has differentiated banking licences for each lending category: Universal banking, payment banks, small-finance banks, and NBFCs. While it is aligning rules even for banks and big NBFCs, the new set of rules may be prescribed for nimble fintech firms, but with little access to depositors’ funds.“There is also a view within the central bank that either a working group or a committee to deliberate regulations is needed for these emerging segments,” said a person aware of the discussions. “The consensus opinion is that the regulator should go with light-touch regulations and put the onus on banks and NBFCs dealing with such institutions to follow terms laid down by the RBI.”Over the past 12 months, the central bank team is learnt to have taken representations from various industry participants and banks to develop a consultative approach toward regulating these new entities.These consultations have gathered pace in recent months, especially as the Indian market has seen forays by several players with significant neo-banking ambitions. Startups such as Open, Razorpay and Niyo, global neo-banks such as Revolut, and large corporations including Amazon are seeking to scale their respective neo banks.Currently, these banking intermediaries are loosely regulated and don’t have a definition of their own. They operate through different models where their regulations follow the nature of their partnership with licensed banks.For instance, a neo bank that opens bank accounts for its corporate customers may need a business correspondent licence, whereas some firms that work with merchants on offering current account and expense management services would have to apply for the payment aggregator licence as specified under the PSS Act of 2007.Similarly, some digital banking entities also simply classify themselves as third-party service providers (TSP) and build their services for a licensed player as merely a platform or a technology provider. 83554977Another person said the RBI is currently leaning toward the “Self-Regulatory Organisation” or SRO structure, where it will put the onus of adherence to regulations on such independent bodies.“Our conversation with the regulator shows that it is in favour of setting up an SRO to regulate such entities and it feels that its direct involvement in the licensing of such firms is not required,” the person cited above said.Regulatory Blind SpotsAccording to experts, these ambiguities are leading to several regulatory blind spots with every emerging development in the broader fintech ecosystem. This has prompted the central bank to opt for a consultative approach in studying these classes of banking intermediaries.“There are two schools of thought on regulating neo-banks. One is the model followed in the UK and Hong Kong, where licences for neo banks are given on fulfilling certain criteria,” a source cited above said.“The second model followed in the US, as well as in India currently, is to have licensed banks monitor these entities,” said the source. “Even for such a model, there needs to be specific definitions and scope of permissible activities, as these are consumer-facing companies that could potentially render banking intermediation functions, including account opening, merchant management and credit disbursement for banks.”Another purpose of specifying such codes is to ensure that the word ‘banks’ is not used lightly as a prefix or a suffix by entities. In the Indian context, ‘banks’ are highly regulated entities with stringent capital and compliance requirements, said another executive presenting the industry’s views before the RBI.“Most neo banks in India are currently building on a Prepaid Payments Instrument (PPI) licence of a regulated bank,” said Sachin G, founder of Buildd, an embedded finance firm. “While these arrangements allow for a quick product launch and nice customer experience for onboarding, there is no significant value-add in terms of differentiated products or new way to doing banking.”

from Economic Times https://bit.ly/3vojMrP
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