Adapting To Change: Expert Insights Into The Impact Of RBI Regulations On NBFCs And Fintech Ecosystem

As we delve into the current financial year, it's paramount to dissect the nuanced interplay between RBI directives and the adaptability of NBFCs and fintech firms

An eagerly anticipated event for the fintech industry that unfolded last calendar year was the promulgation of the Guidelines on Default Loss Guarantee (DLG) in Digital Lending.

By Tashwinder Singh 

The RBI's regulations have a big impact on the dynamic financial services industry as they continue to shape the growth of the fintech ecosystem and NBFCs. With each regulatory amendment, a ripple effect permeates through the industry, impacting operations, innovation, and ultimately, the consumer experience. As we delve into the current financial year, it's paramount to dissect the nuanced interplay between RBI directives and the adaptability of NBFCs and fintech firms.

An eagerly anticipated event for the fintech industry that unfolded last calendar year was the promulgation of the Guidelines on Default Loss Guarantee (DLG) in Digital Lending. The Guidelines brought about much-needed clarity on whether and to what extent DLGs could be used to cover the exposure of regulated entities like banks and NBFCs in digital lending arrangements.

While this clarity was generally welcomed by NBFC and fintech industry, certain quarters of the industry felt that the 5 per cent cap on the DLG needed a relook, as it could adversely affect the confidence of lenders in taking exposure in certain segments of credit, particularly in unsecured credit and thereby affect business volumes in such credit segment. Additionally, the requirement of maintenance of the DLG in the form of fixed deposits, cash deposits, or bank guarantees necessitated a relook by lending institutions into several existing DLG arrangements, which had been negotiated as corporate guarantees. It also placed demands on the loan service providing fintechs to raise tangible resources to be able to provide DLGs.

Another significant regulatory event was the increase in risk weights applicable to existing and new consumer credit from 100 per cent to 125 per cent. These regulations had been prompted by the need to address buildup in risks, arising from a surge in consumer credit.

These regulations are expected to adversely impact the consumer credit portfolio size for both banks and NBFCs, especially, as NBFCs and banks are expected to respond to such changes by raising the interest rates applicable to such exposures. However, these directions are expected to leave MSME and business loan portfolios untouched. Thus, the NBFCs and fintechs focussed on MSME and business loans were likely to not have been impacted by this circular.

 In the interest of ensuring transparency on penal charges, RBI issued instructions to regulated entities in August 2023, mandating treatment of penalty, howsoever called, for non-compliance of material terms and conditions of loan contract as "penal charges" and prohibiting capitalisation of penal charges. It is understood that the Finance Industry Development Council, a representative body of NBFCs in India, has sought guidance from the RBI on certain issues concerning this circular.  For the time being, the implementation of this circular has been postponed to April 1, 2024.

In conclusion, the RBI is a stalwart guardian of the nation's credit system. With an ever-evolving financial landscape and new challenges on the horizon, one remains hopeful that RBI will continue to perform its role with the same alacrity as before. To get through to the wider public, RBI has often clarified the import and intention behind its circulars through several means, including the publication of expected FAQs on several issues. This is a welcome step; especially as regulatory strictures have to often abandon colloquialism in favour of precision. It is suggested that RBI investigate additional avenues, including interactive methodologies, in this direction of policy education.

The author is the MD and CEO at Niyogin Fintech Ltd.

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