Jun 20, 2016

Why India's swelling fintech industry has a lot to thank Raghuram Rajan for

BYAnupam Manur

The section of our economy that might be most distressed to see Raghuram Rajan not take up his second term as RBI governor is the fintech (Financial Technology) space. Yes, there is a general brouhaha over his exit, but there is more outrage because of political reasons than economic ones. The leaders of the Opposition will use this as another issue to mount an attack on the ruling government. Big businesses have not been overly partial to the RBI Governor; they’ll say they have reacted to his moves in exactly the same manner that they have always been doing, which is to cheer the rate cuts and condemn hikes or status quo. Very few truly understand monetary policy or how the transmission mechanism affects their lives.

This is precisely the reason why comments by Fintech companies hold a lot more water. This space was genuinely affected by the policies of the RBI with Rajan at the helm.  

Take this statement by Amrish Rao, managing director at Citrus Wallets, one of the hundreds of new fintech companies that have mushroomed in the past few years: “It is very disappointing that Rajan would not be there for three more years. He had done a lot in digital payments and [we] appreciate the kind of work he had done to ensure security in digital transactions. The RBI under Rajan had been on the cutting edge of technology, which the [new] regulator needs to carry forward now.”
Rajan has had a rather successful stint as RBI governor. He stabilised inflation at a crucial time (with generous help from falling crude prices); he managed to bring about positive real rates; he started on a quest to reduce the Non Performing Assets (NPA) of banks and brought the issue of wilful defaulters to everyone’s notice; he increased Forex reserves considerably; and his term coincided with a slight rebounding of Indian economy. Though these were needed, none are outside the purview of the normal functions of an RBI Governor.
However, what has truly stood out as his achievement is the much-needed disruptions in the banking sector, of which creating competition in the banking sector and an enabling environment for fintech startups rank right on top.

After nearly 14 years, the RBI, under Rajan, decided to issue 23 new licenses in 2014 (of which, 22 are operational): 2 universal banking licenses, 11 payment bank licenses, and 10 small finance bank licenses.

The big set of reforms in the fintech space undertaken by Rajan and Co. at the RBI is to revolutionise payments systems in India. A major step in this direction was accelerating the work of the National Payments Corporation of India (NPCI), which is an umbrella organisation or a platform to facilitate all electronic retail payments in India. It includes various payment systems like National Financial Switch (NFS), Immediate Payment System (IMPS), Aadhar Payments Bridge System (APBS), RuPay cards and the Unified Payment Interface.
The RuPay card has been instrumental in reducing transaction costs involved in using credit and debit cards as means of payment. Until now, domestic transactions, which account for 90% of total transactions using credit and debit cards, had to be routed through a switch located outside India, which significantly raised the transaction costs. RuPay cards, since their launch in 2012, have managed to gain 35% of the market share behind Visa (50%).
Though the NPCI and RuPay were set up before Rajan’s tenure in 2008 and 2012 respectively, it was under him that their activities really took off.
The NPCI’s most ambitious project is UPI or the Unified Payments Interface, which is set to revolutionise the way bank transfers are made in India. As such, it received a special mention in Rajan’s message to the RBI staff:

“We have worked on an enabling framework for National Payments Corporation of India to roll out the Universal Payment Interface, which will soon revolutionise mobile to mobile payments in the country”.  

With the UPI, a person can transfer money from one account to another as easily as sending an SMS. The UPI enables anyone with a smartphone to make a transfer of money using a two-step authentication process, converting a mobile phone to a virtual debit card. It requires the Aadhar number and a mobile phone number or a virtual address without the need for account details or IFSC codes.
This interface is vendor agnostic, so banks, e-commerce portals, or any other platform involved in monetary transactions can include this interface within their payment applications instead of the end users having to use multiple applications. The UPI is the world’s first truly open and decentralised payment system. Due to this, it has the potential to really bridge the gap between big existing payment gateways and any new entrant. A couple of college students can potentially create an app that uses UPI for payments, concentrating on the user interface and they can take on any giants in the business such as PayPal.

Raghuram Rajan’s approach to regulating the fintech space is an interesting departure from most other regulators in India. He follows a “Wait, watch, understand and regulate” approach.

Rajan has not been in a hurry to jump on the nascent space, instead, allowing it to grow and define itself before providing guidelines. This has really allowed private fintech companies to flourish.
There are many startups that are focused on e-wallets, accounts and deposits, insurance, investments, loans, agriculture and rural crowd funding, cards, payments, and personal financial planning, all of which are services that a Universal Bank would offer. There are 750 fintech companies in India, out of which 174 were created in 2015. Finally, many of the private banks are using technology to offer new services and attract new customers.
This approach was also visible when the RBI issued a draft policy on Peer-to-Peer (P2P) lending in India. P2P companies have been around since 2012, albeit in a very small capacity. P2P lending is the practice of lending money to individuals or businesses through an online portal that matches lenders directly with the borrowers. The portal, apart from connecting the two parties, also runs a background credit check, and, in return, takes a commission from the transaction.
The P2P lending space is currently unregulated by the RBI. It released a draft policy proposal in May for comments from the public and is yet to come up with an official policy. Its initial proposal was to categorise P2P lending platforms as non-banking financial companies.

In what could be the final gift to the fintech space, Rajan has recently set-up a multi-disciplinary panel to understand fintech companies and to create the right ecosystem for them.

The panel will consist of representatives from all financial regulators, stakeholders and banks to conduct an exploratory study about the present situation, what are the present hurdles and the best way to regulate the space.
If the committee gets it right and proposes a way to set up the right ecosystem for fintech startups, it could as well be Rajan’s lasting legacy as RBI governor. It will have a massive impact on financial inclusion and growth and innovation in financial services in India and the world.

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Anupam Manur is a writer of FactorDaily.