Regulators should balance innovation in non-banks, mitigate risks in banks

Mumbai: There are adequate reasons for regulators and policymakers to adopt a balance between supporting growth and product innovation in the non-bank sector, and mitigating risks in the traditional banking system, said a report by the Centre for Advanced Financial Research and Learning (Cafral) on Tuesday.

“The quality of the underwriting processes and third-party lending practices among NBFCs and FinTech companies warrant that regulators exercise high vigilance and active and continuous surveillance,” it said.

Set up by the Reserve Bank of India (RBI) to promote research in the finance, macroeconomics, and public policy, Cafral is a not-for-profit organization that became operational in January 2011.

The report said there are concerns about the spillover of losses from the online lending activities to the traditional banking sector. The stronger the linkages between the traditional lending and online lending sectors, the larger the spillover.

“Currently, the share of the digital lending in the overall credit pie is small and does not immediately warrant panic. However, the sector has been growing non-linearly, thanks to the ease of scalability in platforms. Therefore, it might be important to assess the potential stability risks digital lending would pose to the larger economy in the near future as it grows,” it said/

Moreover, since the poor and the marginalized sections of the society are an important market group segment that digital lending targets, the Cafral report said that any losses in digital lending have important implications for credit availability and financial inclusion for this group.

“The proliferation of NBFC credit can pose risks to the financial sector especially as they become systemically more important, as was evident in the aftermath of the Global Financial Crisis (GFC) in 2008,” it said.

According to the report, a possible channel for such a systemic issue can be due to the segment of consumers these non-banks target and the interest rate they charge to such consumers.

“Over and above these factors, there are FinTech NBFCs and other such vendors, which act as an extra layer between consumers and NBFCs. Adding this extra layer of third-party vendors can further obfuscate risks in the financial system,” it said, adding that central banks around the world are modifying regulation to strike a balance between maintaining healthy financial conditions for the macro economy and enabling an environment for innovation and development of the non-banking sector.

Interestingly, the report found that fintech lending is strongly related to the growth of homegrown fast payments platform UPI (unified payments interface). Comparatively, the relationship between scheduled commercial bank (SCB) lending and UPI growth is weaker.

“A 10% increase in per capita UPI transactions is associated with 4.6% rise in per capita fintech lending, and only a 1.5% increase in per capita SCB lending. The relationship is even stronger when the speed of growth is considered: a 10% increase in the UPI growth rate is associated with an almost 8.1% increase in fintech growth, compared to a 6.9% corresponding rise in SCB lending growth,” it said.

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Updated: 07 Nov 2023, 07:21 PM IST

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