Focus on emerging risks in fintech space, says RBI annual report

While the Reserve Bank of India (RBI) is encouraging and facilitating innovation in the fintech space, it is also keeping a close eye on the emerging risks.

“The central bank, while encouraging innovation, is also factoring in emerging risks in the fintech segment. Greater use of technology accentuates the concerns related to cyber security,” the RBI said in its annual report for 2021-22.

Fintechs have disrupted the financial services space in terms of products, customer servicing, back-end analytics, and delivery of services. “…such innovation first disrupts the market and once it establishes its constructive role, the regulators and authorities step in to regulate the space to nurture the innovation in a sustainable manner and to also mitigate any associated risks,” the RBI said.

Although it is widely believed that regulations will, perhaps, kill the innovations, the RBI has argued that regulations/legislations are needed for sustainable growth of a sector.

“With increasing impact of the fintech segment on both macro (financial stability and cyber security) and micro levels (consumer protection and financial inclusion), it becomes pertinent to keep facilitating innovation, while also bringing regulatory order in the fintech space,” the RBI said.

The RBI has also expressed concerns on the involvement of bigtechs in banking, finance services, and insurance space as their involvement brings along systemic risks that have implications for financial stability. “…it is the endeavour of the Reserve Bank to mitigate such risks through careful choice of technology and frameworks, while providing an impetus to fintech in a wide array of useful applications in the financial service industry,” the RBI said.

“…the Reserve Bank’s approach will have to balance innovation with regulation, without compromising on any of the principles of risk management,” it added.

The RBI has flagged the risk of bigtechs entering the BFSI space earlier also. In the Trend and Progress Report released in December 2021, the RBI said, with BigTechs lending either directly or in partnership with regulated financial entities, enhancing the regulatory approach by blending activity-based and entity-based regulations may not be enough to ensure stability. While use of digital channels in financial services is a welcome move, the potential downside risks embedded in such endeavours need to be addressed, the RBI had said.

It came in the backdrop of a working group of the RBI cautioning about big tech players. It said if these players enter the digital lending space, it could have regulatory implications on concentration and competition risk.