RBI released the framework for the fintech sector’s Self-Regulatory organisations (SROs). The SRO would create an environment conducive to innovation while enforcing compliance and regulatory adherence.
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India, a country of 1.4 billion people, is driven by a young, consumption-oriented demographic, fuelling its growth. Private consumption contributes to approximately 58 percent of the nominal GDP. India’s digital public infrastructure (DPI), technological advancement in analytics and artificial intelligence (AI), and, most importantly, fintech–financial institution collaborations have played a pivotal role in the growth of unsecured credit, which in turn supports consumption growth. However, unsecured retail credit can challenge borrowers and financial institutions during economic shocks.
To address the systemic risk posed by high unsecured loans, the Reserve Bank of India (RBI), with a degree of caution, increased the risk weightage of unsecured lending from 100 percent to 125 percent in November 2023. This impacted lenders’ capital requirements and, in turn, increased consumer lending rates.
This move was possibly a pre-emptive measure to manage perceived risks in the financial sector in case of a potential economic downturn. It also highlighted the need for responsible borrowing by individuals. It served as a deterrent to impulse buying on credit, as overleveraging due to impulsive buying can present significant challenges for borrowers in the event of an unforeseen economic shock. This structural intervention muted the growth of the outstanding value of both unsecured personal loans, from 30 percent (June 2022 – June 2023) to 16 percent (June 2023 – June 2024), and of credit cards, from 38 percent to 25 percent during the same period.
While the changes in risk weightage for unsecured credit addressed the systemic challenge posed by such unsecured retail loans, digital retail lending carries its own operational risk nuances, potentially evolving into systemic operational risks.
With a series of interventions in reporting, technology frameworks, and suitable industry structures, the RBI is likely aiming to mitigate these challenges. Firstly, in 2021, the RBI introduced the Account Aggregator (AA) framework, replacing paper-based processes with a secure, consent-based system to move data from A to B in just a few clicks. An AA is an RBI-regulated entity that enables individuals to consent to share their data with any regulated third party. Bank statements, SEBI-regulated depository and mutual fund data, and GST data are available on the AA network. The AA framework has enhanced customer centricity in digital lending, lowered costs, and ensured high-provenance data.
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Secondly, in May 2024, the RBI released the framework for the fintech sector’s Self-Regulatory organisations (SROs). The SRO would create an environment conducive to innovation while enforcing compliance and regulatory adherence. An SRO can help shape the industry, reduce customer complaints, and enhance trust in the digital lending ecosystem. Self-regulation often provides the advantage of adaptability to rapid technological advancements and evolving market dynamics, which are essential in the fintech space.
Thirdly, the monetary policy announcement in August 2024 further adds to this narrative. The central bank notified banks to increase the frequency of updating their credit information to Credit Information Companies (CICs), such as CIBIL-TransUnion, Equifax, and CRIF Himark, from once a month to once a fortnight. The CICs must process this credit data within five days rather than the previously stipulated seven days. CICs, popularly known as credit bureaus, are RBI-licensed and authorised entities that maintain and share financial information about individuals and companies among financial institutions. Sharing loan data, such as outstanding balances and repayment history, among financial institutions can help make effective credit decisions.
The longer the time to report credit data to CICs, the higher the credit risk. Due to this delay in reporting, borrowers can over-leverage themselves by seeking loans from different institutions within the institution–CIC reporting window. Hence, this reduced reporting time will mitigate systemic risk, especially in digital lending. Ideally, reporting to CICs should move towards real-time technological development and connectivity, although real-time reporting might pose a challenge for smaller lenders.
Interestingly, the RBI has maintained the repo rate at 6.5% for nine consecutive announcements, effectively keeping the cost of funds unchanged and thereby creating a conducive environment for credit growth. The RBI has demonstrated an alternative mechanism for effectively managing systemic credit risk through other structural interventions such as the AA framework, changes in CIC reporting, the establishment of an SRO, and the increase in risk weightage.
These interventions by the RBI are a classic example of balancing technology, policy, and regulation to foster credit growth while managing systemic credit risk and protecting borrower’s interests.
About the authors Ashish Desai is Associate Professor, Information Management and Analytics, SPJIMR; and U. Kartik Jeewan is Post Graduate Programme in Management (PGPM) student, Class of 2024, SPJIMR.
Views are personal.
[This article has been reproduced with permission from SP Jain Institute of Management & Research, Mumbai. Views expressed by authors are personal.]