Let’s end the Wild West ways of fintech lending

Source: The post is based on an article “Let’s end the Wild West ways of fintech lending” published in Live Mint on 25^th August 2022.

Syllabus: GS 3 – Financial Institutions

Context: The internet has revolutionized digital businesses. Many such businesses are practicing unfair business practices and nil accountability. Fintech is fast becoming one such business.

Fintech promised efficient and cheaper credit operations so that borrowers do not have to spend days filling out meaningless forms.

A working group set up by the Reserve Bank of India (RBI) says fintech lenders in India are not following existing rules and regulations and indulging in unethical practices.

Defining fintech

In a recent podcast, Aditya Narain, deputy director of the International Monetary Fund, defined fintech as “technology-driven innovation in financial services”.

He also said that fintech covers all manner of firms, from small startups to large universal banks.

It meant that any business with financial products at its core has to be regulated for the sake of proper growth, financial system stability, and protection of depositor and customer interests.

What is the view of fintech on regulations?

Many fintech lenders consider that they should be free of regulation because they operate in a free market.

Why fintech regulation is necessary?

The regulatory framework and legal structure in India mandate that fintech must be regulated by RBI to conduct any lending business. This is necessary for two reasons:

First, regulatory compliance imposes a cost on regulated entities.

• The increase in the number of regulators and touchpoints will compel fintechs to employ additional manpower for compliance.
• This will increase operational costs, and startup fintech firms enjoy an unfair cost advantage by avoiding regulatory compliance.

Second, not adhering to regulation can lead to adverse market outcomes or the unintended consequences of widespread instability.

• This will impose not only additional costs on all players but could also erode public confidence in the online lending ecosystem.
• This will have an impact on all financial systems, especially when innovation in the financial system, products, and credit delivery platforms and mechanisms are deemed critical for achieving meaningful financial inclusion.