August 14, 2020
FinTechs are slowly getting formalized in India. The more the central bank’s governor mentions it with every successive circular, the more this is apparent. Consider the report on QR codes, for instance. The RBI had commissioned a committee under an eminent IIT Bombay professor last year to look into the future of QR code deployment.
This was not a sudden move—the RBI has been focusing on digital for a long time. Despite myriad attempts, the rise of cash has been difficult to stifle in India. In fact, an increase in currency in circulation in the first four months of 2020 (₹2.66 trillion) has been higher than the increase in the entire duration of 2019 (₹2.4 trillion). This has led the RBI to coin the phrase, “Cash is king, but digital is divine.”
There were a lot of different suggestions in the report, some of which include phasing out closed-loop QR (for example, a Paytm Wallet exclusive QR) and withdrawing zero MDR (MDR is the fee that merchants pay banks for accepting through digital means). There’s another suggestion that appeared both in the QR Report as well as the Monetary Policy announcement – Offline Payments.
The RBI doesn’t want operators to stay restricted to the online medium only (as it massively restricts a huge chunk of the rural population which does not have access to network connectivity), whether pushing for offline QR codes or USSD technology. Now it is conducting a pilot scheme to push for more offline payment methods, where the upper limit for a single transaction will be ₹200, and the total limit will be ₹2000. India reportedly has around 500 million feature phone (non-smartphone) users, where this innovation could help bring in financial inclusion. Let’s hope NPCI can make USSD as popular as UPI.
So who are the FinTech players that NPCI is working with on this?
In a progressive move, the RBI set up an Innovation Hub, which will support and promote new technology in areas such as cybersecurity, data analytics, delivery platforms, and payment services—all for the purpose of attaining financial inclusion and more efficient banking services. Although the details and the funds allotted are yet to be announced, it is to be noted that this is the RBI’s second move to promote FinTech.
The first one was the creation of a regulatory sandbox last year, the purpose of which was to offer an environment of live testing of new innovations under a controlled setup. Under the sandbox, the RBI can relax regulations so that innovators can have more flexibility. In fact, six proposals were received in the first round of applications, but the trials have been delayed due to COVID-19.
Priority Sector Lending (PSL) is an effective tool used by the RBI to force banks to divert their funds towards cash-starved sectors that are normally ignored due to their inherent riskiness or lack of ROI opportunities. Startups are one such sector. PSL guidelines haven’t really been changed since 2015, so this is a welcome move by the central bank. Although all startups aren’t necessarily FinTechs, the bigger picture is that FinTechs now have a formal source of funding.
We can hopefully see some startups in this list next year:
The Indian central bank’s progress might be slower compared to other emerging economies. However, the intent is clear—the RBI is helmed by someone that wants to leverage machine learning and big data analytics to analyze the asset quality of banks remotely.
Coupled with the government’s push towards ease of digital onboarding, FinTechs are only going to have an easier job implementing their solutions. A true Digital India may be closer than we realize.