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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