A list of what fintech players want from regulators in 2023 including clarity on FLDG, transparency in NBFC licensing, neobanking licenses, tax relief, priority sector classification, UPI incentives share, and new KYC solutions.
2022 was a tumultuous year for fintech. One dotted by regulatory rebukes and restrictions coupled with a funding winter. Here’s what the industry wishes for in 2023.
Wish 1: Clarity on first loan default guarantees
Fintechs want
first loan default guarantees (FLDG) to be regulated instead of prohibited.
FLDG is an arrangement under which a fintech entity compensates the lender (it
partners with) if borrowers it recommended default on loans. But last
September, the digital lending guidelines created
confusion about the permissibility of FLDG. The industry wants the
regulator to provide clarity and cap the percentage of risk transferred under
FLDG, instead of a complete prohibition. Some fintechs are seeking permission
for FLDG between regulated entities, while others want risk-sharing to be
allowed with unregulated fintechs too.
Wish 2: Transparent process for NBFC authorization
Fintechs want
the NBFC authorization process to stop being a black box. The RBI is clear,
either be an authorized lender, or don’t lend. An NBFC license allows a
non-bank fintech to lend off its own books. But last year, only a handful of
NBFC licenses were granted. While the
NBFC applications of many prominent players were rejected. The
RBI seems uneasy
about the ownership and source of funds of fintechs being linked to tax havens,
and the high-interest rates charged by fintechs. While these are the reasons
being speculated, industry bodies like the Digital Lenders Association of India
have sought formal
clarity on why NBFC authorizations are being rejected.
Wish 3: Tax relief for fintechs
Services that
fintechs provide to regulated entities attract a GST of 18%. The industry
has requested GST
exemption for early-stage fintechs and those enabling financial inclusion.
Wish 4: Enabling framework for neo banks
Under current
law, fintechs can’t accept deposits, give loans, or operate a payment system
without regulatory approval. So, fintech entities partner with banks, NBFCs,
and payment system operators. But these partnerships are governed by a
patchwork of regulations, like outsourcing norms for banks and guidelines for business
correspondents. These regulations often have overlaps and
inconsistencies. We spoke to Deena Jacob, Co-founder and CFO
at Open on this. “The regulations for operating
neobanking model (as a whole) in partnership with banks need to be clearer.
Right now, the guidelines regulate the partnerships in a fragmented manner”,
she observed. “A partnership-led digital banking wave will be
a game changer for faster penetration of banking and financial services”,
she added. So, fintechs want clearer risk-based regulations governing
partnerships that acknowledge changing market realities. In 2023, neo banks
also hope for a
licensing framework for full-stack digital banks (which don’t have any physical
presence). So that they can provide deposit and lending services on their own.
Wish 5: Priority sector lending classification for fintechs
To receive
affordable access to capital, fintechs want to be included in the priority
sector lending category. Amidst a challenging macroeconomic environment,
fintech players have difficulty raising funds.
So, they want loans to
fintechs to be classified as priority sector lending – a category that the RBI
encourages banks and NBFCs to lend to, like MSMEs.
Wish 6: A fair share of MDR compensation for fintechs
Fintechs have
been critical to UPI’s success and want to be compensated for providing UPI
services for free. Banks and payment service providers are not allowed to
charge any fees from merchants on UPI and Rupay debit card payments. So, banks,
payment intermediaries (like payment aggregators), and technology service
providers (like Google Pay and PhonePe) absorb the cost of providing these
services. The government recently announced an
Rs.2600 crore incentive scheme to compensate them. Under the scheme, banks must
share the incentives they receive with other payment system operators and
participants. But historically, these
incentives haven’t trickled down to fintechs in the payment chain. The
government and NPCI will prescribe the
proportion and manner in which banks must share the incentives with fintechs.
Fintechs want a fair share of the pie, especially because of their contribution
to merchant and customer onboarding.
Wish 7: New remote-KYC solutions
Fintechs hope for innovative remote KYC solutions, especially for low-value savings and loan accounts. Video KYC through Aadhar-based verification simplified the customer identification process for financial services. But it’s expensive, high friction, and unsuitable for areas without reliable internet access.
(This article has been authored by the fintech team at Ikigai Law. It originally appeared in the January edition of FinTales, our monthly fintech newsletter.)
Image credits: Pixabay
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