The Reserve Bank of India (RBI) is not in favour of existing banks launching digital-only banks as the model carries some risks, Governor Shaktikanta Das said on Friday. The central bank has chosen to not accept suggestions on such arrangements, he added.
“We don’t have a separate regulatory framework for what is called a digital bank,” Das said, speaking at financialexpress.com’s Modern BFSI Summit. “I feel there is no need for any bank to set up a separate digital bank, to have a sort of parallel entity in the same business. What they can achieve by having a parallel entity they can very well achieve as a part of their own organisation. There were some suggestions which came, but we felt that it carries certain risks with it. So we have not accepted that at the moment.”
In November 2021, Niti Aayog had floated a discussion paper offering a roadmap for a regime for licensing and regulation of digital banks in India. The paper had prompted large banks to start devising plans to build digital banks of their own in readiness for a licensing regime.
On the growing presence of large technology companies, or Big Tech, in the financial services space, Das said this poses risks around competition and data protection. The regulator is, therefore, working to evolve an appropriate approach to regulating fintechs, which could be activity-based, entity-based, outcome-based or a mix of all three, he added.
Big Tech companies with a non-financial background which have entered the financial services space could potentially be a source of disruption to the financial system, the governor said. “As you would be aware, such companies, whether from e-commerce, social media and search engine platforms, ride hailing and similar businesses have started to offer financial services in a big way on their own or on behalf of others,” Das said. These companies have an enormous amount of customer data which has helped them to offer tailored financial services to entities and individuals lacking credit history or collateral.
The governor took issue with the trend of banks and other traditional lenders utilising platforms provided by fintech companies in their internal processes for credit risk assessment. “Such large scale use of new methodologies in credit risk assessment can create systemic concerns like over-leverage, inadequate credit assessment etc,” Das said, adding that authorities and regulators will have to strike a fine balance between enabling innovation and preventing systemic risks.
Big Tech also poses concerns related to competition, data protection, data sharing and operational resilience of critical services in situations where banks and non-banking financial services (NBFCs) utilise the services of such tech companies. These concerns could even materialise in sectors other than financial services, Das said.
“The provision of financial services through the digital channel, including lending through online platforms and mobile apps, have brought in issues relating to unfair practices, data privacy, documentation, transparency, conduct, breach of licensing conditions, etc,” Das said, adding that the RBI will soon issue suitable guidelines and measures to make the digital lending ecosystem safe and sound while enhancing customer protection and encouraging innovation.
The regulator’s approach to Big Tech regulation is to closely watch the terms of partnerships between banks, NBFCs and fintechs, as there must be dos and don’ts with regard to what regulated entities can and cannot outsource to fintechs.
While making a case for better management of risks by fintechs, Das observed that the RBI does not want to stifle innovation in the early stages of development of an ecosystem like Buy Now, Pay Later (BNPL). “Our job as a regulator is to keep assessing what kind of leverage is being built up in the system and if it will pose a challenge at the systemic level. We watch very clearly what kind of BNPL products the major players are offering and what kind of leverage they are building up,” Das said, adding, “As and when required, we will come up with guidelines, but at a very incipient stage, we should not interfere and kill some new business methods or models.”
