RBI should extend fintech sandbox guidelines to its regulation making process also, says expert

Financial Express, March 30, 2019

Even while RBI governor Shaktikanta Das on Monday stressed on setting up a ‘regulatory sandbox’ for fintech ecosystem, which he said has the potential to revamp India’s financial services ecosystem, the market expert opined that relevant sandbox guidelines neendn’t be limited to fintech companies only.

“The guidelines to be adopted by the RBI for regulatory sandbox should also be applicable in the central bank’s regulation-making process and designing policies, by adopting the Regulatory Impact Assessment (RIA) framework,” Amol Kulkarni, Director, CUTS International told Financial Express Online.

Incorporating RIA basically means that it can enable RBI to design several regulatory options aimed at achieving regulatory objectives; assess costs and benefits of such options and the possibility of achieving objectives through stakeholder consultation and data analysis. This can then help the RBI in figuring out which is the most appropriate approach to achieve regulatory objectives in a way that costs to stakeholders are substantially outweighed by benefits, said Kulkarni.

Kulkarni asserted that policies, for instance, pertaining to prepaid payment instruments (PPI) and peer-to-peer (P2P) lending, adopted by the RBI in financial services are “more or less a knee jerk reaction” to various market developments without thinking through in terms of consequences.

CUTS International in its report on digital payments in April last year had highlighted that as per PPI regulations, all existing non-bank PPI issuers are required to have a minimum positive net-worth requirement of Rs 15 crore as on March 31, 2020, from Rs 1 crore earlier.

“The substantial increase in net worth requirement may adversely impact smaller players currently operating in the market, who might not be in a position to comply with the revised requirements by March 2020. In addition, the revised requirements may dissuade smaller interested players to enter the market,” the report said.

With respect to P2P lending, there are caps on exposures of lenders and amounts borrowed by borrowers. The lenders can lend a maximum of Rs 10 lakh cumulatively while individually they can have an exposure to a borrower up to Rs 50,000. “This is expected to reduce the attractiveness of the platform and the design of products which lenders can offer,” the report added.

While the objective is to reduce the risk and ensure that the lending happens in an orderly manner, Kulkarni said that there are better ways to do that by asking for greater disclosure and transparent mechanism which are market-based to ensure that lenders and borrowers are aware of the risks involved.

The sandbox would “benefit fintech companies by way of reduced time to launch innovative products at a lower cost,” Das said an event organised by NITI Aayog, adding that as many as 1,218 fintech companies are operating in India that have created a large number of jobs.

The RBI’s working group on fintech and digital banking had, in November 2017, stressed on launching a regulatory sandbox for containing the consequences of failure and analysing its reasons.

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