The Reserve Bank of India (RBI) has unveiled its fiscal year 2023-24 agenda, setting its sights on transforming the financial landscape through cutting-edge initiatives. With a strong emphasis on central bank digital currency (CBDC), financial technology (FinTech), and regulatory technology (RegTech), the RBI is poised to lead the charge toward a digitally empowered economy.

As part of its agenda, the RBI is gearing up to conduct groundbreaking pilots, dubbed Utkarsh 2.0, to explore the immense potential of CBDC in retail and wholesale sectors. These initiatives demonstrate the RBI's unwavering commitment to staying at the forefront of technological innovation.

Empowering Compliance: The Rise of Regulatory Technology (RegTech)

Acknowledging the significance of effective regulation in the rapidly evolving FinTech landscape, the RBI emphasizes adopting Regulatory Technology (RegTech) solutions. These solutions will enhance compliance processes, automate reporting and bolster data security. By striking a balance between innovation and regulatory compliance, the RBI aims to protect the interests of consumers and stakeholders, promoting transparency, reducing fraud and fortifying cybersecurity measures.

Where Is RegTech Standing in India?

RegTech in India is still in its early stages of development, but it is growing rapidly. The Indian government has supported RegTech and several startups and established companies are developing RegTech solutions. Some examples of RegTech companies in India include Finolex Software, NSDL e-Xpress, Signzy, etc.

Factors Driving RegTech in India

• Increasing complexity of regulations
• Need for financial institutions to comply with regulations in multiple jurisdictions
• Growing demand for data analytics and artificial intelligence (AI) solutions

Challenges Faced by the RegTech Market in India

• Lack of awareness: There is a lack of awareness about RegTech solutions among financial institutions and other regulated entities
• High cost: RegTech solutions can be expensive, which is another challenge that is hindering the adoption of these solutions
• Lack of skilled resources: There is a lack of skilled resources in India capable of implementing and managing RegTech solutions

What Can Be the Future of RegTech in India?

According to us, RBI can be looking forward to below solutions:

• ONDC-like platform: Where regulatory bodies, lenders and other stakeholders can facilitate the exchange of regulatory and compliance requirements
• Regulatory Sandboxes: Regulatory sandboxes provide a controlled environment for testing and validating innovative RegTech solutions
• Advanced-Data Analytics: Increase the use of AI and ML to build and train regulatory and compliance models to find any violation, early non-compliance prediction and early warning systems for fintech, lenders and regulators

Unlocking Working Capital: Technology Interventions for Business Growth

Efficient management of working capital is crucial for the sustainability and growth of businesses, especially SMEs. The RBI recognizes this and is focused on leveraging technology to develop solutions that enable a seamless flow of working capital. The RBI aims to empower businesses, improve cash flow management and enhance their ability to weather economic uncertainties by harnessing digital platforms, alternative lending models and data-driven insights.

The Current State of Digital Working Capital Finance

Working capital finance in India is estimated to be around ₹20 trillion (~$250 billion). This includes traditional sources of working capital finance, such as bank loans and newer fintech-enabled solutions.

The use of fintech-enabled working capital solutions is growing rapidly in India. In 2021, the Indian fintech market for working capital finance was worth ₹123 million (~$1.5 billion) and it is expected to grow to ₹412 million (~$5 billion) by 2025.

Why Does Digital Working Capital Finance Become So Important Now More Than Ever?

The current state of working capital finance in India is in flux. Traditional sources of working capital finance, such as bank loans, are becoming increasingly difficult to access for small and medium-sized businesses (SMBs). This is due to several factors, including:

• Rising cost of credit
• Tightening of lending standards
• Increasing NPA
• Kutcha records or non-digital bookkeeping

Digital capabilities can increase the probability of getting working capital loans from SMBs.

Opportunity for Fintech in Working Capital Financing

• Credit Distributor: Fintech can become a credit distributor by lending on its own books. For this, they will need an NBFC license but this can result in extra profit by earning interest
• Co-lending: Becoming a loan sourcing platform for their larger peers while keeping a small portion of the loan on their books
• Trail revenues: Fintech can earn money from its financial partners when customers it brings in pay interest on time and this continues as long as the credit line is active

P2P Comes Under the Lens

It's worth noting that digital lending platforms may face some deterrents due to the increased scrutiny by the Reserve Bank of India (RBI) especially on peer-to-peer (P2P) lending platforms now. The RBI has recently sent detailed inquiries to registered P2P lending startups, explicitly focusing on their partnership models with consumer-facing applications, the flow of funds, risk sharing, and other related aspects.

This scrutiny results from the RBI's efforts to ensure compliance with regulatory guidelines and assess potential risks in the digital lending space. So, it is a long road to building a successful business for these digital working capital lenders in this tight regulatory environment

Central Bank Digital Currency (CBDC): Embracing the Digital Rupee

The RBI has been exploring the implementation of a CBDC since 2020. In December 2022, the RBI released a discussion paper on CBDC outlining the potential benefits and challenges of a digital rupee. The move aims to enhance financial inclusion, improve cross-border remittances, and streamline payment systems. By leveraging blockchain technology, the RBI seeks to harness the potential of a CBDC to revolutionize the financial landscape, making transactions more secure and efficient.

CBDC Till Now in India

RBI launched two forms of CBDC:

• CBDC-R (e₹-R): Available for use by all, including the private sector, non-financial consumers and businesses
• CBDC-W (e₹-W): Available for use by selected financial institutions for interbank transfers and related wholesale transactions

The RBI initiated a pilot for the wholesale segment, known as Digital Rupee-Wholesale (e₹-W), on November 1, 2022. As of December '22, the wholesale CBDC recorded an average of ₹ 325 crore in daily transactions.

The retail segment pilot, Digital Rupee-Retail (e₹-R), was launched on December 1, 2022, within a closed user group (CUG) comprising participating customers and merchants.

What It Means for Other Modes of Payments When CBDC Will Go Full-fledged?

• Traditional Cash Transactions: CBDCs aim to replicate the features of physical cash in a digital form
• Bank Accounts and Transfers: CBDC has the potential to revolutionize the way people store and transfer money
• UPI: CBDC requires way less infrastructure than UPI for fund flow reducing maintenance cost

Why the Focus Now on CBDC?

• CBDCs also have an offline feature, meaning you don’t need the internet to receive this new type of ‘cash’. This improves cash availability in remote areas and works even during power/network outages, further increasing Bharat’s digitization and financial inclusion
• For the government, it will reduce operational costs involved in physical cash management. CBDC will take a one-time infrastructure setup and maintenance cost, but it will remove the operational cost of printing cash, delivery of cash, security involved in delivery, storage facility cost, etc
• The government can transfer the subsidy via CBDCs to the beneficiary, who can use it for that specific purpose only. So a CBDC transferred for buying ration cannot be used for paying rent. This is even better than direct cash transfers to bank accounts where you are not sure how the cash is being utilized
• Being in direct control of RBI, CBDC can be used to boost a specific part of the economy, like allocating a budget in the form of CBDC for only the tech or MSME sector
• Countries can save on international trade. US banks earn some commission for every dollar traded in the international market. With CBDC interoperability, countries can save this commission

Fuelling FinTech Innovation: Collaboration and Cutting-edge Technologies

India's FinTech industry has witnessed remarkable growth in recent years. The RBI aims to nurture this thriving ecosystem by fostering collaboration between traditional financial institutions and FinTech startups. This collaborative approach encourages the development of innovative solutions to tackle existing challenges. The integration of cutting-edge technologies like artificial intelligence (AI), machine learning (ML) and distributed ledger technology (DLT) will pave the way for transformative advancements in the financial sector.

Recent Developments

• Removal of FLDG (first loan default guarantee): With this Bank has to bear all the risk making them skeptical of their fintech partner in handling frauds
• PA/PG guidelines: An LSP should not be involved in the handling of funds flowing from the lender to the borrower or vice versa, hence making it difficult for PA PG to act as an LSP
• Ban on PPI (prepaid instruments) based lending: Extending a credit line through any PPI has been prohibited by the Reserve Bank of India
• Pre-approved loans on UPI: RBI has allowed banks to offer pre-approved credit on UPI
• Fees on P2M PPI transactions: NPCI suggested a 1.1% interchange fee on UPI transactions above ₹2,000 through PPIs. Digital wallet companies will pay a 0.15% charge to the remitter bank for wallet recharges above ₹2,000

Impact of These Developments

More than innovations, these recent developments have put the future of fintech in limbo. With many guidelines and legal frameworks, it has constrained the growth of fintech and traditional lenders are the ones reaping more benefits from these developments.

What Exactly Is RBI Implying by Its Agenda for Fintech?

It is still not clear how RBI will fuel the fintech growth but indirectly, it can be implying its focus on OCEN (Open Credit Enablement Network) framework. It is a standardized framework of APIs that allows for the sharing and exchange of credit information between financial institutions and other fintech players in order to make credit decisions more accurately and efficiently.

The Bottom Line: A Transformative Path Ahead

The RBI's FinTech agenda for FY23-24 reflects its unwavering commitment to drive India's financial transformation. The RBI aims to create an inclusive, efficient and technologically advanced financial ecosystem by embracing digital innovation, fostering collaboration and ensuring regulatory compliance. These initiatives will enhance financial inclusion and customer experience, fuel economic growth and propel India toward becoming a global FinTech hub.

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