According to a media agency, several prominent fintech companies have decided to participate in the digital currency pilot program run by the Indian central bank. These companies include Google Pay, PhonePe, Cred, Mobikwik, and AmazonPay.
According to sources who spoke with the news agency, the corporations will accomplish this by providing e-rupee transactions.
Notably, the digital currency pilot program was launched by the Reserve Bank of India (RBI) in December 2022.
At first, the only financial institutions authorized to sell e-rupee through their mobile apps were the central bank. However, fintechs were also permitted to offer e-rupee transactions after RBI’s permission in April of this year.
Then, rumor has it that fintech companies are requesting the central bank clarify the norms of interaction with banks so they can implement use cases for central bank digital currency (CBDC).
Fintech companies are reportedly collaborating with the Reserve Bank of India (RBI), the National Payments Corporation of India (NPCI), and the domestic payment authorities in preparation for the e-rupee’s launch in the coming three to four months, according to a prominent news agency’s report.
According to the research, the number of digital currency transactions has dropped significantly from over 1 million per day last year to about 1-2 lakh each day.
Use Cases for Retail CBDCs
This news arrives as reports surface that banks are collaborating with fintech entrepreneurs on a range of fronts to launch retail use cases for Central Bank Digital Currency (CBDCs).
The first round of the CBDC retail trial for NBPSOs is testing two significant use cases. One involves corporate cost management and the other involves subsidy payments for agricultural supplies.
Banks are presently focussing on deploying these use cases, and they will now also collaborate closely with fintech firms to support the CBDC trial.
Following the beginning of the Central Bank Digital Currency (CBDC) experiment in December 2022, RBI deputy governor T Rabi Sankar announced in April that 2.2 crore transactions had been handled.
What is CBDC?
The Reserve Bank of India (RBI) has created CBDCs, a digital token equivalent to the Rupee. Using distributed ledger technology (DLT), it could one day replace physical currency with digital transactions.
The CBDC pilot has been serving both the wholesale and retail sectors since its start in 2022, and an increasing number of institutions are rushing to become a part of it.
The country’s Central Bank unveiled new features, like the ability to make CBDC retail payments offline and using user-defined algorithms, in February of this year to boost CBDC sales.
Following a “scrutiny” of “select NBFC-P2P companies” from June to September 2023, the Reserve Bank of India (RBI) discovered “multiple violations” of the regulations established in October 2017, when the licensing standards were published, to welcome these companies to the Indian financial market.
It was preceded by the RBI’s March 2016 release of the initial P2P lending draft for stakeholder comment. In addition to meeting the criteria for being “fit and proper” to operate P2P platforms, a minimum of around 2 crore net-owned money is required according to the licensing standards.
Although not all of the approximately 25 licenses issued by the RBI have gone live, some of them have. Approximately one-third of the fifteen entities that went live have now gone dark. According to analysts, the industry’s outstanding loan book is estimated to be over 6,000 crore, and four companies control more than 90% of the market.
A loan of approximately 10 lakhs could be made at the outset. The amount increased to over 50 lakhs in December 2019. Through P2P platforms, a lender can distribute this funding to numerous borrowers. But regardless of how many lenders there are, a borrower cannot receive more than ~10 lakh. The maximum amount that a lender can lose due to a single borrower is around $50,000. (A minimum of 20 lenders are required in the event that a borrower requests ~10 lakh.)
Platforms that facilitate peer-to-peer (P2P) lending allow users to pool their savings in escrow accounts and then lend those funds to other users or small businesses without requiring collateral.
Lenders can access their money before loans are fully processed on P2P platforms. This implies that over the remaining time of the loan, a different lender will take over for the first one, without the lenders on the platform having to say anything. The “deposit-taking” feature of these NBFC-P2Ps is the root cause of loan replacement.
Loan contracts on the platform must be signed by both the lender and the borrower in accordance with RBI regulations. But instead of that, platforms are only giving out loans to people who have lenders’ whole approval. The standards for licensing are being violated here.
The standards that control the transfer of money are another source of worry. In order to reinvest the funds, these platforms are moving the repayments from the borrower’s escrow accounts to the lenders’ escrow accounts. Repayment funds must be sent from the borrower’s escrow account to the bank account of the lender.
P2P platforms have been issued a stern warning by the RBI, urging them to immediately cease these actions. They risk regulatory and supervisory measures if they do not.
Number of Peer to Peer Non Banking Financial Companies in India as of January 2022, by City
Industry Adopting a ‘Wait and Watch’ Policy
P2P Lending Platforms
The official explained that new alliances take substantial time, technological, and legal resources to be integrated, thus the industry is simply taking a “wait and watch” approach rather than rapidly expanding.
Liquiloans has partnered with a number of prominent P2P lenders, including Cred, Avail Finance, Uni, and BharatPe; LenDen Club has partnered with PhonePe, Karza, and BharatPe. The general pace of business has decreased, even though partnerships are still continuing. Since October, corporations have been consistently engaging with the RBI, therefore experts do not see this trend continuing.
During an occasion, RBI deputy governor M. Rajeshwar Rao reportedly stated that NBFC-P2Ps’ actions did not seem to comply with regulatory norms. The majority of the lenders on these sites probably don’t have the training or education to properly assess the dangers of lending money.
While the RBI first published comprehensive rules for the market in 2017, 2019 saw the introduction of certain updates to those rules. However, the central bank has been providing platforms with guidance on several aspects of compliance over the past 12 to 18 months.
The Department of Regulation at RBI has been approached by these businesses to clarify several important matters. A decision on these practices is also required by the Department of Supervision.
The peer-to-peer lending market is currently valued at an estimated 7,000–8,000 crore rupees. About twenty P2P licensing systems can be found in India. They are all NBFCs that have registered with the RBI.
Payouts, processing fees, and platform fees all contribute to the platforms’ bottom lines. The maximum amount that a lender can put on a platform is Rs 50 lakh. One borrower is limited to an investment of no more than Rs 50,000.
At no point in time should a borrower’s total loan amount exceed Rs 10 lakh. This loan has a maximum maturity term of 36 months. An annual interest rate of 36% is charged by some sites.
The Reserve Bank of India’s intensified scrutiny of NBFC-P2P companies has revealed multiple violations of established regulations, including issues with loan processing, fund transfers, and compliance with licensing standards.
Despite partnerships and engagement with the RBI, concerns persist regarding the industry’s compliance and operational practices. The conclusion underscores the need for stringent regulatory oversight and enhanced industry compliance to sustain the integrity and stability of the P2P lending market in India.
FAQs
Which is the largest P2P lending platform in the world?
Lending Club is the world’s largest P2P platform.
Is P2P lending legal in India?
Yes, P2P lending is completely legal and fully regulated by RBI in India.
Which P2P lending is best in India?
Some of the most popular P2P lending platforms in India are LenDenClub, Faircent, Lendbox, etc.
The Indian government has taken a bold step towards boosting the country’s gold reserves. The Reserve Bank of India (RBI) has been granted the authority to import gold without the burden of customs duty and the Agriculture Infrastructure and Development Cess (AIDC).
Traditionally revered in Indian culture as a symbol of wealth and prosperity, gold has received special attention from policymakers.
This government’s decision, notified on March 12, marks a pivotal moment in the country’s economic landscape, with implications that extend far beyond the glittering precious metal.
Let’s delve into the intricacies of this exemption, its impact on the Indian economy, and the rationale behind this significant policy shift.
As the world’s second-largest consumer of gold, after China, India’s relationship with the metal is multifaceted, shaping not only personal adornment but also economic policies and trade dynamics.
Gold imports in India have been subject to customs duty and the Agriculture Infrastructure and Development Cess (AIDC), acting as barriers to the seamless importation of this valuable resource.
At present, the import duty on gold, silver findings, and coins of precious metals is at 15%, comprising a Basic Custom Duty (BCD) of 10%, along with 5% for the Agriculture Infrastructure Development Cess (AIDC).
Even the Reserve Bank of India (RBI), tasked with managing the nation’s foreign exchange reserves, was not exempt from these levies until the recent policy change.
According to the latest reserve management report from the Reserve Bank of India, as of September 2023, the central bank possessed a total of 800.79 tonnes of gold, inclusive of gold deposits amounting to 39.89 tonnes. Out of this total, 388.06 tonnes were held in overseas locations, while 372.84 tonnes were held domestically.
The decision to waive these charges for the RBI signifies a notable departure from past practices and signals a fundamental shift in India’s approach to gold imports.
The exemption granted to the RBI not only strengthens the central bank’s position in managing foreign exchange reserves but also underscores the government’s commitment to enhancing financial stability.
RBI Governor Shaktikanta Das informed reporters during the customary post-policy review press conference on April 5 that the accumulation of gold reserves is a component of our reserve deployment strategy.
“We are building up a gold reserve that is a part of our reserve deployment,” a media report quoted Das.
With gold prices often rising during economic uncertainty, bolstering gold reserves can serve as a vital buffer against external shocks and contribute to the country’s sovereign wealth.
By allowing the RBI to import gold without additional levies, the government is not only recognizing the central bank’s pivotal role in financial management but also sending a positive signal to the gold market in India.
This move aligns with global trends of central banks diversifying their reserves, positioning gold as a safe-haven asset in times of economic volatility. The policy shift reflects a broader strategy to promote reserve diversification, support the domestic gold market, and fortify India’s overall economic resilience in a rapidly changing world.
“Equity markets have gained while bond yields and US dollar have remained volatile. The overall outlook is challenged by continuing geopolitical conflicts, disruptions in trade routes and high public debt burden,” RBI chief said in his statement after the monetary review.
Implications of the Exemption
The exemption granted holds significant implications for various aspects of the Indian economy.
Here are some key points to consider:
Boost to Gold Reserves
This decision allows the RBI to increase its gold reserves, strengthening the country’s overall foreign exchange holdings. According to the World Gold Council, India’s official gold reserves stood at 695.31 metric tons as of December 2023, representing 6.7% of total foreign reserves.
Cost Advantage for the RBI
Importing gold without levies provides a cost advantage to the RBI, enabling more strategic management of foreign exchange reserves. With gold prices fluctuating, this exemption allows the RBI to capitalize on favorable market conditions without the burden of additional costs.
“In the Reserve Bank, we have embarked on strengthening and building up higher (forex) reserves. Our reserves are around USD 620 billion at the moment. Individual emerging market economies have to insulate and protect their economies from the spillovers of global currency movements and fluctuations,“ RBI head Shaktikanta Das has said. The RBI’s forex reserves rose to an all-time high of USD 645.6 billion as of March 29, 2024.
Breaking: RBI Governor Shaktikanta Das announces India’s Foreign Exchange reserves have surged to a record-breaking $645.6 billion as of March 29, 2024! 💰💥 This milestone showcases India’s economic strength and resilience. #CongressManifesto pic.twitter.com/gh6wVfzIJ5
The exemption can potentially stabilize the gold market in India, impacting market sentiment and prices due to the RBI’s significant gold purchases.
According to data from the India Bullion and Jewellers Association (IBJA), gold price in India is around Rs 71,210 per 10 gm as of April 8. As per market analysts, the gold rate may range around Rs 75,000 per 10 gm in the coming weeks.
“Gold prices have surged on safe-haven demand,” said the Monetary Policy Statement, 2024-25 Resolution of the Monetary Policy Committee (MPC) April 3 to 5, 2024.
Gold prices are currently reaching near record-high levels in both domestic and international markets, largely due to increasing speculation that the US central bank could implement its first rate cut as soon as June.
The impact of this exemption goes beyond the surface of gold importation. By reducing dependence on imports and promoting financial stability, the RBI’s increased flexibility in gold imports sets a new precedent for economic management. This move aligns with the government’s goal of enhancing sovereign wealth and fostering a more robust gold market in India.
As per the World Gold Council: “Gold is an important component of central bank reserves because of its safety, liquidity and return characteristics – the three key investment objectives for central banks. As such, they are significant holders of gold, accounting for around a fifth of all the gold that has been mined throughout history.”
The exemption granted to the RBI from paying customs duty and cess on gold imports has profound implications for the Indian economy.
Reduced Dependence on Imports
India heavily relies on gold imports, with cumulative imports surging by 38.76% reaching USD 44 billion from April to February in 2023-24, as per data from the Ministry of Commerce and Industry. Gold imports jumped substantially by 90.0 percent during October to February 2023-24 period, reflecting strong retail demand.
“Gold prices rallied in Q4 of 2023-24 as financial markets priced in deeper policy rate cuts for 2024 as reflected in lower bond yields and a weaker US dollar. The hardening of gold prices continued in Q1:2024 to record high in March on growing expectations of interest rate cuts by the US Fed, coupled with demand by central banks and Chinese investors,” as per RBI’s monetary policy report released on Friday, April 5th.
The exemption to RBI helps reduce the country’s dependence on external sources for gold supply, enhancing India’s self-sufficiency in the gold market.
On March 28, the Reserve Bank of India authorized Indian Overseas Bank, Punjab National Bank, and Union Bank of India to exclusively import gold for the fiscal year 2024-25, effective from April 1st.
RBI has also listed 11 other banks to import gold and silver both from April 1.
Banks act as intermediaries in the importation process, assisting gems and jewelry makers in acquiring the necessary gold for their operations.
Foreign Exchange Management
The RBI plays a crucial role in managing India’s foreign exchange reserves. By importing gold without additional levies, the RBI can diversify its reserves and manage foreign exchange fluctuations more effectively. This strengthens the RBI’s ability to maintain a stable exchange rate and manage any external shocks.
“The Indian rupee (INR) has remained largely range-bound as compared to both its emerging market peers and a few advanced economies during 2023-24. The INR was the most stable among major currencies during this period. As compared to the previous three years, the INR exhibited the lowest volatility in 2023-24. The relative stability of the INR reflects India’s sound macroeconomic fundamentals, financial stability and improvements in the external position,” RBI Governor Das said in a statement after the monetary policy review.
On the external financing side, India’s foreign portfolio investment (FPI) flows saw a significant turnaround in 2023-24. Net FPI inflows stood at USD 41.6 billion during 2023-24, as against net outflows in the preceding two years (USD 14.1 billion in 2021-22 and USD 4.8 billion in 2022-23). “This is the second highest level of FPI inflow after 2014-15,” Das said in his statement.
Enhancing Sovereign Wealth
Accumulating gold reserves enhances the country’s sovereign wealth. As gold prices tend to rise in times of economic uncertainty, having substantial gold reserves can act as a buffer against external shocks and support the Indian economy in challenging times.
“In January, the Reserve Bank of India made a significant addition to its gold reserves, acquiring 8.7 tonnes. This marks the most substantial purchase since July 2022, elevating the RBI’s total gold holdings to 812.3 tonnes—up from 803.58 tonnes in December 2023. Data from the World Gold Council confirms this increase. The strategy behind the central bank’s gold accumulation is to diversify its foreign exchange reserves and provide a buffer against foreign currency fluctuations, as noted by financial experts,” a senior manager at Kotak Mahindra Bank said.
Gold Reserves of Largest Gold Holding Countries Worldwide as of 2nd Quarter 2023
Rationale Behind the Exemption
By acknowledging the RBI’s crucial responsibility in maintaining financial stability and diversifying foreign exchange reserves, the government aims to empower the RBI to effectively manage the economy’s monetary aspects.
Granting this exemption to the RBI also serves as a positive signal to gold importers in India, showcasing the government’s commitment to facilitating gold imports and supporting the domestic gold market. This move is poised to attract more investors and stimulate economic activity within the gold sector, fostering growth opportunities and bolstering the overall economic landscape.
Furthermore, the decision aligns with the global trend of central banks diversifying their reserves, with gold being recognized as a safe-haven asset. Allowing the RBI to import gold without levies not only promotes reserve diversification but also enhances the stability and strength of India’s foreign exchange holdings. This strategic move positions the country favorably in the international financial arena.
Central banks around the world, including those of Russia, China, Turkey, Kazakhstan, and Poland, have been actively buying gold as part of their reserve management strategies. They view gold as a valuable asset for diversifying their holdings and enhancing financial stability.
Unwavering demand from central banks has been supportive of gold demand again this year and helped offset weakness in other areas of the market, keeping 2023 demand well above the ten-year moving average.
“In addition to monetary policy, geopolitical uncertainty is often a key driver of gold demand, and in 2024 we expect this to have a pronounced impact on the market. Ongoing conflicts, trade tensions, and over 60 elections taking place around the world are likely to encourage investors to turn to gold for its proven track record as a haven asset. We know that central banks often cite gold’s performance in times of crisis as a reason to buy, which suggests demand from this sector will stay high this year and may help to offset a slowdown in consumer demand due to elevated gold prices and slowing economic growth,” Louise Street, Senior Markets Analyst at the World Gold Council, commented.
In essence, the rationale behind this exemption underscores a multi-faceted approach aimed at promoting financial stability, fostering economic growth, and empowering the RBI in its pivotal role. By exempting the RBI from import levies on gold, the government paves the way for a more robust and resilient economy, reinforcing India’s position as a key player in the global financial landscape.
India ranked as the second-largest gold importer globally following China, possesses approximately 14% of the world’s gold reserves, amounting to around 27,000 tonnes.
Conclusion
Embracing a Golden Future
By leveraging gold as a strategic asset, India is poised to navigate economic uncertainties with greater resilience and fortitude.
Fortifying Financial Resilience
The exemption granted to the RBI signifies a pivotal step towards fortifying India’s financial resilience and sovereignty. As the RBI accumulates gold reserves free from additional levies, the country enhances its sovereign wealth and insulates itself against external shocks. With gold prices serving as a reliable hedge during turbulent times, India’s decision to exempt the RBI from import levies underscores a proactive approach to safeguarding the nation’s economic well-being.
Paving the Path to Prosperity
This exemption not only streamlines the gold import process but also signals a positive outlook for investors and industry stakeholders. As India embraces its rich cultural affinity for gold while embracing modern economic strategies, the future shines bright with possibilities for growth and prosperity.
Shaping a Resilient Economic Landscape
By empowering the central bank to diversify its reserves and strengthen its financial position, India is laying the groundwork for a more stable and robust economy. This strategic move aligns with global trends in reserve management and positions India as a forward-thinking player in the international arena.
“All central banks are moving towards de-dollarization strategies.As rightly pointed out, this could be a big & bold move by the Govt.of Bharat towards stabilizing the Indian Rupee!,” said Building MyGold-‘Bharat ka pehla Gold Bank’ Founder & CEO Amol Bansal. MyGold is a distinct platform or an app that addresses various shortcomings commonly found in existing digital gold platforms.
The MyGold app offers users the flexibility to monetize physical gold lying in homes and bank lockers. With features like ‘Upload Gold’ for digitizing existing idle gold at home or in the bank, and ‘Sell Gold’ for converting gold into money, users can easily manage their gold assets with a simple appointment booking.
Future Implications
As the Reserve Bank begins to import gold without the burden of customs duty and cess, the future implications of this decision loom large on the horizon. The exemption granted to the RBI opens doors to a myriad of possibilities that could shape the Indian gold market in the years to come.
Here are some key future implications to consider:
Diversification of Investment Portfolios
With the RBI’s increased ability to import gold at a lower cost, there is a potential for a shift towards diversification in investment portfolios. According to the World Gold Council, central banks across the globe have been increasing their gold reserves, with purchases reaching 273.9 tonnes in the third quarter of 2023. One tonne of gold is equal to 1000 kg of gold.
Technological Advancements
The exemption granted to the RBI could pave the way for technological advancements in the gold market. Innovations in digital platforms, blockchain technology, and secure transactions may revolutionize the way gold is traded and stored, offering greater convenience and transparency to consumers.
Global Market Influence
The RBI’s enhanced capacity to import gold without levies could position India as a significant player in the global gold market. Increased gold reserves and strategic imports may impact international prices, fostering stronger ties with gold-producing nations and shaping India’s role in the global economic landscape.
The government’s decision to allow the RBI to import gold without levies may spark broader policy reforms in the gold sector. Discussions on regulatory frameworks, trade agreements, and market interventions could take center stage, paving the way for a more dynamic and resilient gold market in India.
The future implications of the RBI’s exemption from customs duty and cess on gold imports hold the promise of transforming the Indian gold market into a hub of innovation, investment diversification, and global influence. As stakeholders navigate these uncharted waters, the evolving landscape presents both opportunities and challenges that will shape the trajectory of the gold market in India and beyond.
Navigating the realm of gold imports without paying customs duty and cess poses a set of potential challenges that must be carefully considered.
One key concern is the impact on the domestic gold market dynamics. With the RBI’s increased ability to import gold at a reduced cost, there may be fluctuations in supply and demand, potentially leading to price volatility and market uncertainties. Balancing the need for a stable market with the benefits of reduced import levies will require a delicate equilibrium.
Furthermore, the exemption granted to the RBI could also raise questions about fair competition within the gold industry. As the central bank gains a cost advantage in importing gold, there may be implications for other market participants, including gold traders, jewelers, and investors. Ensuring a level playing field and addressing any disparities that may arise from this exemption will be crucial to maintaining a healthy and transparent gold market ecosystem in India.
Another challenge that may arise from allowing the RBI to import gold without levies is the potential impact on revenue generation for the government. Customs duty and cess on gold imports serve as significant sources of revenue, contributing to the country’s fiscal resources. The exemption could lead to a shortfall in revenue, prompting the government to explore alternative sources or adjust fiscal policies accordingly to mitigate any adverse effects.
However, the revenue department is pretty happy with the revenue generated by gold imports this fiscal.
“Gold imports have given us good revenue….In nine months this fiscal, gold imports are at 617 tonnes. So gold imports should exceed 800 tonnes at this rate,” Revenue Secretary Sanjay Malhotra had said in an interview to Moneycontrol in February.
Moreover, managing the increased gold reserves accumulated by the RBI as a result of this exemption could present logistical challenges. Safeguarding and effectively utilizing these reserves to support financial stability and economic growth will require strategic planning and prudent decision-making.
Overall, while the decision to allow the RBI to import gold without paying import levies brings significant advantages, it also brings a set of challenges that need to be carefully addressed. By proactively addressing these challenges and implementing effective mechanisms to mitigate any potential drawbacks, India can harness the benefits of this policy change while safeguarding the integrity and stability of its gold market and economy.
While the implications of this exemption are still unfolding, it is evident that this move will have a profound impact on various stakeholders, from consumers and investors to policymakers and experts.
As India navigates through the complexities of this policy change, it is essential to closely monitor its effects on the economy and assess the long-term implications for the country’s financial well-being.
FAQs
What is the recent announcement regarding gold import by RBI?
The Indian government has allowed the Reserve Bank of India (RBI) to import gold without having to pay customs duty and the Agriculture Infrastructure and Development Cess (AIDC).
What are the implications of this exemption?
This exemption has significant implications for the Indian economy, gold market, and financial stability. It opens up new opportunities for RBI to manage its gold reserves more efficiently.
How will this exemption impact the Indian economy?
The exemption is expected to have a positive impact on the Indian economy by potentially boosting the gold market, increasing financial stability, and enhancing RBI’s ability to manage its gold reserves effectively.
What is the rationale behind this significant policy shift?
The rationale behind this exemption is to streamline the process of gold import by RBI, enhance its operational efficiency, and align with the government’s efforts to promote economic growth and stability.
Paytm company has become the talk of the town these days as RBI is cracking down on its business operations. Those in the know say that the Reserve Bank of India’s technical audit exposed accounting and supervisory issues caused by data and money traffic flows between the highly regulated Paytm Payments Bank Ltd. and the rest of the Paytm universe. According to those who asked not to be named since the issue is private, the regulator had previously notified Paytm about these problems, but they have not been remedied.
Those in the know also alleged that the regulator became concerned about the bank’s and Paytm’s shared management structures. They noticed that the same group of senior executives were representing both the bank and the fintech firm as a whole, which raised concerns about possible biases.
Citing ongoing noncompliance and supervisory concerns, the Reserve Bank of India (RBI) issued an order to Paytm Payments Bank, a subsidiary of Paytm and 49% owner of the parent firm, on January 31, 2024, ordering it to cease operations, including its popular mobile wallet business. The part of the bank that handles payments for the massive Paytm brand was ordered by the regulator to cease all banking operations as of February 29.
Stock in the affiliated company, One 97 Communication, fell below 20% the day after the Reserve Bank of India (RBI) forbade Paytm Payments’ Bank from accepting deposits and conducting credit transactions, including top-ups, in any customer accounts, wallets, FASTags, or other instruments after February 29.
On the National Stock Exchange, the stock price plummeted 19.99%, reaching Rs 609. On the BSE, it dropped 20% to Rs 608.80, its lower circuit limit. Following many brokerages’ downgrades of the stock, the company’s market capitalization dropped 9,664 crore rupees to 38,664 crore rupees in early trade.
According to an analyst call by One97 Communications, the parent company of Paytm, the company is collaborating with partner banks to expand its financial services and payments business. The CEO and creator of Paytm, Vijay Shekhar Sharma, has stated categorically that the firm will reduce its reliance on its affiliate, Paytm Payments Bank.
“Marketing business services are not affected due to these directions,” Sharma said, adding that OCL and PPSL are already in the process of shifting nodal accounts to other banks. Companies will collaborate with major banks, according to Milind Deora, president and group financial officer, who also offers these services to other consumer-facing businesses.
Fintech Players Supporting Paytm
Despite RBI’s strong crackdown on the fintech firm, many fintech players have come out with strong support for Paytm. There has been a lot of support for the Paytm founder from other company founders and VCs.
Some members of the startup community have spoken out against the RBI, claiming that it has an unsupportive attitude towards financial technology companies.
Following a protracted period of non-compliance with central bank regulations regarding customer due diligence, fund usage, and technology infrastructure, the Reserve Bank of India (RBI) has decided to block new deposits into Paytm Payments Bank accounts and other popular digital wallets starting in March.
Co-founder of BharatPe Ashneer Grover vented his anger at the RBI in a tweet, calling the limits imposed on Paytm “Doglapan.”
Extending his disappointment, Grover wrote on X “I don’t understand RBI. Clearly RBI does not want FinTechs in business – of late all regulations / moves are against Fintechs. Such moves will kill the sector altogether. The @FinMinIndia @nsitharaman @PMOIndia need to step in. Startups have been biggest creators of market cap and employment in last decade. Today IIM and IIT are struggling to place people – we as a country cannot afford such overreach ! Tom-Tom-Ing @UPI_NPCI to the world and punishing pioneers in the space is pure ‘Doglapan’ !”
I don’t understand RBI. Clearly RBI does not want FinTechs in business – of late all regulations / moves are against Fintechs. Such moves will kill the sector altogether. The @FinMinIndia@nsitharaman@PMOIndia need to step in. Startups have been biggest creators of market cap…
The prime minister’s office, the finance ministry, and Nirmala Sitharaman, the finance minister, are among the important authorities that Grover urged to swiftly resolve the issue because such regulatory restrictions could hinder the expansion of fintech in India.
Capitalmind CEO Deepak Shenoy was shocked by the RBI’s judgment and drew comparisons to the bank’s handling of the Yes Bank issue.
Paytm Experiences an Effect of ₹300-500 CR EBITDA
According to brokerage Macquarie, Paytm Payments Bank’s capacity to provide loan and payment products and retain customers will be significantly hindered by RBI’s restrictions.
Macquarie analyst Suresh Ganapathy noted, “We think revenue and profitability implications in the medium- to long-term could be significant and remain a key item to monitor. I couldn’t agree more.”
The RBI is essentially taking away Paytm’s PPI (pre-paid instrument) license, according to Ganapathy, since there is no immediate plan to fix the issues.
“Lending partners may reevaluate their relationships with Paytm moving forward due to the company’s poor standing with the regulator,” he added further.
One97 Communications and Paytm Payments Services Ltd’s nodal accounts must also be terminated by February 29, according to RBI’s Wednesday announcement.
In an effort to control the unchecked expansion of unsecured consumer lending, the Reserve Bank of India (RBI) recently issued a notification. The directive increases the risk weight for consumer credit exposure of banks and non-banking financial companies (NBFCs), potentially impacting fintech players. Industry experts suggest that these lending institutions will now need to allocate more capital to be set aside against the unsecured loans they disburse.
The RBI’s measure involves a 25-percentage-point increase in the risk weightage for both existing and new unsecured consumer credit exposure of commercial banks and NBFCs, elevating it from 100% to 125%. While the industry players appreciate the move for its risk mitigation aspects, concerns have been raised about the potential decline in loan growth. In essence, this adjustment is expected to drive up the lending costs for unsecured consumer loans.
The RBI has expressed concerns about the escalating trend in unsecured consumer loans, specifically personal and credit card loans. With the latest circular instructing banks and NBFCs to heighten risk weights on such loans and restrict exposure, the RBI aims to curb the rapid growth in this segment.
According to RBI data, personal loans witnessed a 23% growth in August 2023, and credit card outstanding increased by 30%, compared to the figures from August 2022.
The higher risk weights entail that banks and NBFCs must allocate more capital for each loan they extend. In simple terms, this measure safeguards against potential issues if borrowers fail to repay their loans, preventing banks from encountering financial trouble. Lenders are now required to adhere to set limits on exposure to various segments of consumer credit as approved by their boards. Additionally, top-up loans backed by depreciating assets, such as car loans, will now be categorized as unsecured loans.
“RBI’s recent move to strengthen regulations on consumer lending, particularly in personal loans, is a positive step towards risk reduction. In response, our partners have already implemented more stringent underwriting criteria over the last 30 days to ensure loan quality. It’s anticipated that this RBI initiative will contribute to a decline in loan growth, aligning to curb excesses in the NBFC space,” commented Manish Shara, Co-founder & CEO of Zet.
Following global standards, a 100% risk weightage implies that INR 92 out of every INR 100 loan originates from depositors’ money, while INR 8 comes from shareholders’ investment. With the recent 25-percentage-point increase, banks and NBFCs will now need to source INR 10 from shareholders’ investments. This adjustment is expected to impact companies like Paytm, CRED, Navi Finserv, OnEMi Technologies (which operates Kissht and RING), along with several consumer-focused fintechs such as Freo, Fibe, Kreditbee, Paytm, and CRED, considering their substantial share in the number of loans disbursed.
Offering insight into the central bank’s move, Rishabh Goel, Co-founder and CEO of Credgenics, stated, The current rise in risk weight assessment is likely to result in a marginal increase in loan pricing by banks. This serves as a signal urging lenders to exercise caution, especially in the small-ticket loans segment.
Priyanka Chopra, COO, and managing partner for seed investing at IIMA-CIIE, predicted that this move would lead to a moderation of unsecured credit for digital lending startups. However, she noted that established players with a robust capital base and calibrated underwriting are expected to experience minimal impact.
The RBI’s decision was driven by the necessity to control the growth in unsecured loans. Last month, RBI governor Shaktikanta Das emphasized the high growth in certain components of consumer credit, advising banks and NBFCs to enhance internal surveillance mechanisms, address risk build-up, and institute suitable safeguards. The notification also introduced changes to the risk weight of credit card receivables of scheduled commercial banks and bank credit to NBFCs to address potential risk build-up. Furthermore, the RBI stated that all top-up loans against movable assets with inherent depreciation, such as vehicles, must be treated as unsecured loans for credit appraisal, prudential limits, and exposure purposes.
Jaya Vaidhyanathan, CEO of BCT Digital, expressed her support for the RBI’s decision, affirming, “The move to increase risk weights for personal loans is a constructive step, aligning with the central bank’s concerns regarding aggressive lending in the unsecured consumer loans sector. While the overall financial impact of defaults in this category may not be considerable, the sheer volume of individuals drawn to effortless credit for non-essential purposes like electronic gadgets is substantial. This initiative will deter lenders who may have previously adopted lax practices in loan assessment, reminiscent of historical incidents in 2008 involving credit card and personal loan mismanagement.”
The latest sectoral credit growth data from the Reserve Bank of India (RBI) reveals that Indian banks are aggressively expanding their personal loan portfolio, with credit to the segment growing by 30.8%, compared to 19.4% on a year-on-year basis. Fintech firms have sanctioned almost ₹30,000 crore for consumption loans—personal loans, consumer durable loans, vehicle loans between 2015 and 2022—compared to less than ₹5,000 crore disbursed for business loans during the same period, as reported by the RBI-backed Centre for Advanced Financial Research and Learning (CAFRAL).
There Is Currently No Imminent Effect on Interest Rates
There is no immediate anticipation of an impact on interest rates, according to Shibani Kurian, Senior Executive Vice-President & Head of Equity Research at Kotak Mutual Fund. While the augmented risk weights are likely to influence growth in specific segments, large banks and NBFCs are currently well-capitalized, surpassing regulatory requirements. Therefore, raising capital immediately may not be necessary due to the increased risk weights. Banks are expected to assess the impact and decide whether any cost increases need to be passed on to customers. Corporate trainer (Financial Markets) Joydeep Sen concurs, emphasizing that while there might not be an immediate effect on banks’ costs, they are likely to adopt a more cautious approach in the long run.
Naresh Malhotra, a former SBI executive and current Director at JCRC LLP, an accounting firm, emphasizes that NBFCs are more likely to bear the brunt of the impact, facing increased funding costs. As NBFCs borrow from banks to lend to customers, the rise in risk weights will elevate their borrowing costs from banks or through bond issuance. The final impact will be contingent on the resource mix and the proportion of unsecured consumer loans in an NBFC’s overall portfolio. Regarding commercial banks, Malhotra notes that although their unsecured loan portfolio has grown at a rate exceeding the general credit growth rate, their exposure to this segment is more effectively hedged than that of NBFCs. However, he acknowledges that higher capital outlay will also affect commercial banks.
The RBI’s decision to elevate risk weights on unsecured consumer credit, including personal loans, from 100 percent to 125 percent for both banks and NBFCs, has implications for the lending landscape. Additionally, the risk weights for credit card receivables have been revised from 125 percent to 150 percent for banks and from 100 percent to 125 percent for NBFCs.
Is the Era of Easily Accessible Credit Coming to an End?
The era of easily accessible credit might be coming to an end from the borrower’s standpoint. Ritesh Srivastava, Founder and CEO of FREED, a debt relief platform, notes a noticeable shift among lenders, who have become more cautious and stringent in approving new loan applications. The approval rates for new loans currently hover around 4 to 5 percent, a significant drop from the peak of the cycle when they ranged from 8 to 12 percent.
Malhotra emphasizes that the RBI is concerned about the rapid expansion of unsecured credit, prompting the central bank to raise the cost of lending for both banks and NBFCs. The intention is clear—to decelerate the pace of this growth. Kurian echoes this sentiment, pointing out that the heightened capital requirements will gradually ease the competitive fervor in the consumer credit sector, where banks, NBFCs, and fintechs in collaboration with regulated entities have been striving to attract more customers.
Sen provides an additional perspective, stating that in unsecured loans, banks can compensate for delinquencies due to the higher interest rates. However, the consequence of elevated rates is that those diligently repaying their credit card dues end up covering for those who do not—a concept known as “good money for bad money.” This underscores the need for more thorough due diligence, and the increased risk weights will contribute to achieving this.
This shift could be advantageous for individuals with a steady income and strong credit scores. On the flip side, those with irregular incomes and lower credit scores may encounter greater difficulty in securing loans. Adhil Shetty, CEO of BankBazaar.com, explains that for ideal borrowers—those with stable income, a credit score above 750, and a history of timely payments—there should be no impact on existing or new credit lines. Lenders are likely to favor such borrowers, while individuals outside these criteria may find it more challenging to secure loans, a trend that has historically held true.
Impact on Credit Cards
Industry experts we consulted do not foresee any immediate consequences, such as a reduction in credit card limits or higher interest rates, affecting credit cards.
Malhotra emphasizes that the larger source of risk lies in outstanding credit card balances that remain unpaid even after the due date, warranting more attention. Kurian provides additional insight into this matter. Despite the rapid growth in credit card spending, she notes that there has been no deterioration in delinquency. “Revolve rates” (indicating the amount of outstanding credit card balance that remains unpaid) are currently lower than pre-Covid levels. Consequently, banks face no immediate asset quality concerns, making an immediate reduction in credit card limits unlikely. However, in the future, financial institutions may shift their focus to customers with better credit profiles, potentially slowing down the previously rapid growth. Srivastava suggests that existing credit card customers who only make minimum payments may encounter tighter credit limits and possibly a downward revision in limits upon renewals.
On a positive note, Naveen Kukreja, Co-Founder and CEO of Paisabazaar, believes that for lenders with sufficient capital and effective risk management, credit cards and unsecured loans will remain highly profitable segments and continue to be focal points.
Fintech firms anticipate that the effects of the Reserve Bank of India’s directive will become evident within six to twelve months, compelling them to broaden and fortify their secured portfolio. Fintech companies that acquire funds from banks or non-banking financial companies (NBFCs) are swiftly working on expanding their secured portfolio to constitute a minimum of 40 percent of their overall portfolio.
As the digital revolution took over the regular life of people by storm, there are not many areas that remain uninterrupted by it. With the huge impetus given to Digital India by the Government of India, the domain of finance and accounting has also undergone tremendous changes.
Beginning with online payment with the help of UPI, it has gone to newer avenues, wherein digital platforms offer credits to the user. It is widely called digital lending. Using the technology of credit assessment and authentication, websites and apps these days allow their users to lend money. Today, banks are not far behind in this domain. They have come up with their own digital lending platforms. Their experience in traditional lending further gives them the edge to sustain themselves in the market.
In India, a large section of the society depends on the unorganized sector for credit which cracks down on poor farmers and micro enterprises with their high rate of interest. In that regard, the popularity of digital lending has, in fact, bought in financial inclusion meeting the hitherto unmet credit requirements of the people. As digital lending got more popular, it became necessary to keep a check on the activities that are taking place in this domain.
The Reserve Bank of India, in August 2022 released guidelines on digital lending so as to ensure the smooth and safe conduct of transactions through digital platforms. This article will look at important parts and implications of the guidelines issued.
The Reserve Bank of India has issued these guidelines keeping in mind the lending ecosystem of Regulated Entities (RE) and Lending Service Providers (LSP). They have classified digital lenders into three different groups. Firstly, those entities that are regulated by the Reserve Bank of India for lending business in itself.
Secondly, those entities authorized to carry out lending are based on the statutes and regulatory provisions of certain other bodies but are not managed by the RBI.
The third groups include those entities that are outside the purview of any kind of regulatory or statutory provisions.
All those lending groups that do not come within the discretion of the above-mentioned categories are free to formulate their own rules and regulations alluding to the recommendations of the working group.
Let’s take a brief look into the highlighting aspects of the guidelines:
Payments
The guideline mandates that all digital transactions should be made between the bank accounts of the regulated entity and the borrower. It should not include any third party or pool account. When they say Regulated Entity, it means any banking or non-banking financial company.
With regard to the payment of fees during the credit intermediation process, the guidelines clarify that the payment is not to be made by the borrower but should be made by the Non-Banking Financial Companies (NBFCs) i.e, the regulated entities.
If at all there are any penal interest or charges, they are to be disclosed in the key fact statement (KFS) on an annual basis and should be based on the outstanding amount of the loan.
Data Privacy
Data Breaches Worldwide
Data privacy is one of the most concerning thoughts in today’s digital world. The guidelines carefully address this issue by delineating that the usage of user information should be need-based. The digital lending platforms are barred from accessing the user’s files, contact lists, call logs, media, and other telephonic functions.
However, they can have one-time access to their camera and microphone to complete their KYC procedures. This will be possible only after the explicit consent of the customer. Additionally, the guideline also states that the user has the option to deny access to certain data, restrict disclosure of certain information to any third party and deny data retention. The user can also revoke the consent given later if they feel so. They can also delete the application and forget the data when it is being uninstalled or deleted.
While signing up, the digital lending platform needs to disclose the credit limit information related to product features and the related costs. It includes the disclosure of the all-inclusive costs of digital loans in the form of Annual Percentage Rates (APRs). The guidelines also prohibit these platforms from increasing the credit limit without the consent of the borrower.
Reporting Lending to CICs
Any form of lending carried out through Digital Lending Applications (DLAs) of RE or LSPs is to be reported to the Credit Information Companies (CICs) irrespective of their tenure or nature.
The guidelines extend these requirements even to those lending carried out through Buy Now Pay Later model. This is with regard to the provisions of the Credit Information Companies (CIC) Regulation Act, 2005, issued by the Reserve Bank of India at regular intervals.
Options to Exit Loans
The RBI guidelines give the user an option to exit the availed digital loan by paying only the principal and proportionate APR without paying any fine within a stipulated time called the cooling-off period or look-up period. The cooling-off time is determined by the boards of the respective regulating entities. Such a time period should not be less than three days for loans having a tenure of seven days or more and one day for loans having a tenure of fewer than seven days. For those borrowers, who continue even after this period, the provisions of pre-payment will be continued based on the extant RBI guidelines.
Grievance Redressal
Every Regulated Entity (RE) and Lending Service Provider is required to appoint a grievance redressal officer. They are supposed to address the FinTech and Digital lending-related complaints issues, faced by the customers.
Apart from that, the issues related to one’s own Digital Lending Applications are also to be addressed by the officer. Apart from facilitating the option to lodge complaints, the contact details of the respective nodal grievance redressal officer have to be visibly displayed on the website of the regulated entity.
To further foolproof the grievance redressal system, RBI allows the user to file complaints through the Complaint Management System (CMS) portal under the Reserve Bank-Integrated Ombudsman Scheme (RB-IOS) in case the complaint is not resolved within 30 days of filing.
The development of technology services has tremendously contributed to the mushrooming of Digital Lending Services, which gained quick popularity among the young and middle-aged population alike. While such schemes have been helpful to a lot of people, it has also resulted in many unethical and fraudulent practices, wherein users get scammed.
Apart from that, various platforms also use this service as a way to charge exorbitant interest rates from users. It is in such a context that the guidelines released by the RBI become all the more relevant. There was a need to manage and control the proliferation of this budding service. These guidelines will ensure that lending through digital platforms happens responsibly wherein both the parties benefit from the advancement of fintech facilities.
FAQs
When and where was RBI established?
The Reserve Bank of India was established on 1st April 1935, in Kolkata.
Where is the central office of RBI?
RBI headquarters is currently located in Mumbai after it was shifted from Kolkata in 1937.
Who is the current governor of RBI?
Shaktikanta Das is the present governor of RBI.
When did RBI release Guidelines for Digital Lending?
RBI released the Guidelines for Digital Lending in August 2022.
Avantika Bhardwaj
