Banking

Universal Credit Inclusion

It is no news that digital lending has taken a great leap into the life of the customers since its inception in recent years. Given the immense potential that digital lending has to offer in the market, it is quite viable that rapid growth in technology takes place.

But with the rapid growth that is happening in the sector, is putting immense pressure on the seams. It is to be noted that some of these harmful effects of the ever-growing fast growth of digital lending had expressed themselves last year through lack of compliance with customer protection norms.

This had emphatically led the RBI to constitute a working committee to effectively recommend certain guidelines that can strategically allow digital lending to grow. This was done to grow the digital lending sector in a more coherent and orderly fashion to protect the interest and welfare of the users or customers.

Thus, it can be argued that the issue of improving the digital lending sector should be viewed with the primary lens of consumer protection.

It is due to this reason, it is important that it is viewed in terms of stringent re-emphasizing of some of the existing guidelines, namely Fair Practices Code and Outsourced Service Provider Guidelines amongst others. it is well known that for the successful initiation of the process, a governing or regulatory authority is needed for chaperoning the ill aspects of the industry.

Thus, as recommended by the RBI committee, the proposal to effectively set up a self-regulating organization, that can a perfect sense provide in-depth analysis, oversight, and guidance. It is to be noted that the establishment of an industry-led SRO will emphatically help ensure that guidelines can keep pace with the rapid evolution of the industry.

Given that regulation plays a key role in making the industry abide by the regulations, thus it is important to ensure that unregulated lending activities are curbed as largely as possible to preserve consumer confidence and welfare.

This is also needed as last year it was discovered that unregulated lenders were emphatically the prime source for many of the aberrations that were observed in the market. On the top, such an issue garners extra importance due to the fact that such lending activities bypass various guidelines and supervision for responsible lending.

Responsible lending, if not regulated will heavily cost the customers who are largely unaware of the consequences. Some of the recent unregulated lendings that have cropped in the recent years go by the name as buy-now-pay-later.

Quite similarly to the unregulated BNPL sector, the need for curbing the authority of the loan sharks which function through fraudulent apps and technology-based measures is also needed. This can be highly achieved through app marketplace gatekeepers like apple and Google. This will strategically help curtail the immense spread of unscrupulous lending that at the moment is plaguing the market.

But what happens when the system is overburdened with regulation? The answer demands deeper introspection, especially in relation to additional regulations, such as National Financial Consumer Protection Regulation, Agency Financial Service Regulation, etc., it is to be noted that multiplicity of regulations can effectively hamper the growth of the nascent digital lending sector, as this can foster reluctance, inefficiency, and non-competitiveness.

This will be especially true for the recent startups in the digital lending sectors that are currently driven by younger startups. This is true as younger innovative startups increasingly have limited ability to invest in compliance overheads.

Another area of importance is the role of embedded finance. Embedded finance can play a crucial role in reducing information asymmetry that exists in the market and leads to inefficiency. It is no news that information asymmetry is a fundamental problem in extending credit in the market. This issue is systematically resolved through embedded finance as it provides strong end-user control and repayment mechanisms.

Talking about business lending, there are key building blocks of lending and are extensively used in supply chain financing. Given the nature of the business, it is to be noted that largely finances flow to the supplier accounts which are paid back through an intermediary account.

Thus it can be argued that the odious risk is often shared with an anchor corporate that has better operational risk management capability for transactions. Thus, disallowing such intermediary accounts will emphatically and increasingly restrict the ability of risk to flow where, as a matter of fact, it can be operationally managed the best.

Thus, in totality given the changing digital landscape in India and the massive growth potential that the sector has to offer, India needs to inculcate a sense of regulated transaction habits.

On the other hand, the authorities also need to keep in mind that the robust financial system does not need to be overregulated to foster inefficiency in the bussing ecosystem.

The need of the hour is to roll perfectly regulated public financial infrastructure, that facilitates transactions, encourages innovation, and protects the interests of the consumers.

Given the already existing framework, India today stands tall to offer its citizens and businesses the benefits of universal credit access.

At last, it needs to be concluded that digital lending is the need of the hour with increasing relevance every day, and with the right regulatory architecture, it has an immense potential to serve as a pertinent key driver to the growth in the country.

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Auto Debt RBI Rules for Fintech Startup Companies

In another turn of interesting events, the fintech startups could run into a problem. According to auto debit RBI new rules, Fintech companies run at the risk of attracting a 2% equalization levy. In addition to the equalization levy, the fintech startups will also attract additional goods and services tax (GST) at 18%.

This GST will be attracted on part of the money the fintech startups would make through such an arrangement. This would especially include transactions where an Indian citizen has effectively subscribed to the services of a foreign OTT player.

On the other hand, this can also levy in the case where an Indian citizen buys goods and services from a company that is effectively not based in India. Thus, one could effectively state that the Reserve Bank of India’s significant auto-debit rule could effectively and largely bring tax complications for various fintech companies that are operating in In India.

According to the reports, this will also include fintech startups that had set up platforms for banks to effectively integrate with a common e-mandate platform. This was carried out or done to ensure compliance.

This brings various Payment aggregators like Razor pay, BillDesk and PayU under the ambit of the law as these have set up platforms like MandateHQ, SiHub, and Zion, respectively. These had been operating in the capacity to form or provide a “bridge” for banks to complete the transactions.

It is no news that since the introduction of new intermediaries, they have gained popularity in recent years. These intermediaries include platforms like Netflix and Apple stores, functioning apart from the bank. With the increase in popularity, the analysis had shown that they had become an avid link between the customer and the overseas merchant establishment. Due to such arrangement, the tax implications have cropped up and have been introduced by the RBI.

Breaking down the tax structure

It is to be noted that if the tax structure is to be broken down, the equalization levy will constitute up to a 2 percent charge on any transaction which will involve a foreign company over the internet. Additionally, on further inspection, GST that will be charged will effectively depend on the structure of the fintech player’s entities.

Thus, it would depend on how the transaction is routed and the nature of such transactions. Thus, given the ambiguous nature of various forms of transactions that take place, one can state that the government’s new equalization levy could effectively come into play.

In other clarification that has been issued, fintech companies that would attract the 2% equalization levy will be on any overseas transaction or it could also be levied on the company or the merchants that are not based in India. Thus, one can state that such an equalization levy can effectively provide the risk of the platforms charging fees from the merchants.

The businesses that will come under the setup

Firstly, according to analysis, the overseas bank from which the money is being deducted which is effectively not based in India, it will attract an equalization levy of 2 percent. Similarly, these would also include banks that don’t have an emphatic tax presence in India.

The second criterion that will attract tax is the nature and structure of the transactions that will be carried out by the company. In this case, if it is found that a fee that is emphatically received by an Indian bank that doesn’t directly come to an Indian entity, will too effectively attract a 2% tax.

It is to be noted that RBI’s newer laws also include the money that goes through a subsidiary. These subsidiaries are usually of the fintech company, even these could effectively come under RBI’s scrutiny and could attract taxes.

On top of this, there is a GST implication too. GST will come into play if the money that is positively deducted from an Indian’s debit or credit card is done via the fintech’s books before it is remitted in the foreign merchants’ account.

Thus one could effectively state that the services that are provided by the fintech companies in pursuit of validating transactions could actually attract GST on both the transaction fees and the setup fee that is charged by them.

it is to be noted that RBI’s newer rules have come into effect from October 1. Since then it has been stated that banks can only process auto-debit transactions if they fulfill the criteria of sending a pre-debit notification to their customers well before time. This is to say that such notifications should be given out at least 24 hours before the payment.

it is to be noted that such a law has been brought into force as many banks do not wish to indulge in such transitions and do not have the technology for undertaking such transactions. Thus, this has led many to instead turn to fintech companies to effectively provide transaction platforms.

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RBI Proposes New Laws to Regulate Digital Lending

Once again, RBI has stepped up to protect the interests of the consumers, who in pursuit of excess money were preyed on by wealth-mongering organizations on various apps. In order to effectively safeguard the interest of the customers, the Reserve Bank working group has strongly and emphatically suggested the enactment of separate legislation. The legislation has been propped to strategically prevent illegal digital lending through apps of which innocent customers were victims.

It is no news that get-rich easy schemes are scams. With the involvement of Indian citizens in the same, leading to suicides, the RBI has come in to attack the loan sharks. It has emphatically suggested that digital lending apps should be thoroughly scrutinized and verified by a nodal agency.

This should lead to the establishment of a Self-Regulatory Organization that will effectively and positively cover the participants in the digital lending ecosystem.

Thus, one can state that RBI’s recent steps will help in enhancing customer protection and experience, protecting them from a digital or monetary felony, consequentially making the digital lending ecosystem safe. This will also promote healthy innovation in the digital lending system.

But here it is mandatory to mention that, at the moment, taking down all the apps from Appstore is only a temporary and a preventive measure to mitigate the disaster. The verification of the same should be a top priority for the apex bank.

It is to be noted that under the guidance of RBI, the working group has been set up in the backdrop of business conduct and customer protection concerns that are arising out of the spurt in digital lending activities, which really found momentum during the pandemic.

The case

But the aforementioned details, including RBI’s involvement, raise questions about the nature and motives of the customers to get involved in business with such scandalous groups on the apps? It is to be noted that the motivation for such an activity was the pandemic which has excessively curtailed the financial and monetary standing of the middle-class society in India.

With curtailed earnings, increased healthcare expenses, and inflation, easy loans were found tantalizing. This led to a full-fledged affair with the fraudulent loan apps that provided easy loans with high interest. With higher interests and lower-income, people tuned to excessive steps like suicide and self-harm.

This emphatically led the RBI to get involved in the loan app fiasco and formulation of recommendations to mitigate the disaster.

Among other things, it is to be noted that the group also suggested the development of certain baseline technology standards. These standards will have to be adhered to as a pre-condition for offering digital lending solutions.

In order to counter the blackmailing aspect of the fiasco which gave the loan app companies leverage over the consumers in turning the public into an easy target, the RBI has recommended that data collection with the prior and explicit consent of borrowers should emphatically have verifiable audit trails.

In addition to having a verifiable audit trail, the data should also be stored in servers located in India. Data privacy has long needed attention in India, given the fact that India doesn’t have standard and well-crafted rules and regulations for the same.

Further, in order to impactfully curtail the unsolicited commercial communications for digital loans, the committee has also strategically advised the same to be governed by a Code of Conduct to be put in place.

The whole loan app debacle brings to the forefront the need for transparency, better data privacy laws, and a strong vigilance mechanism by the RBI to protect the interest of the public which is currently quite susceptible to harm financially and monetarily.

With the pandemic curtailing financial freedom, it is quite a prevalent possibility that people will ultimately turn to dubious, surreptitious modes to accelerate their wealth. Thus, the need for effective governance and vigilance is the need of the hour. This can be effectively achieved through algorithmic features that are used in digital lending which will help ensure necessary transparency.

What greater attention to the loan apps fiasco is the fact that digital penetration in India is on the rise. Thus, laws to govern the same should be on the trajectory of implementation too. But given the state of data privacy and consumer protection laws, in the country, India has a long way to go. One can certainly state that the recent fraudulent disaster can help provide impetus to the process and safeguard the interest of the consumers.

It is mandatory to be mentioned here that in order to make digital lending a promising reality in India, the authorities will have to with the trust of the citizens, who are rather cynical about the process. Thus, the recent case can be a good start.

With the Reserve Bank constituting the Working Group (WG) on digital lending on to emphatically study all the aspects of digital lending activities in the regulated financial sector as well as by unregulated players in order to put an appropriate regulatory approach in place, one can positively state that future trust-building between the authorities and the citizens is on the rise.

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No Proposal to Recognize Bitcoin As a Currency

In a world where the contentious digital asset namely bitcoin is garnering growing appreciation and acceptance, India is untouched by its charms.

Bitcoin, throughout this year, has gained a special status of legal tender in El Salvador and huge endorsement from public figures like Jack Dorsey and Elon Musk. But is it just the high popularity of the digital asset that has set it on the pinnacle of success in such a short period of time?

Probably not. It is to be noted that the contentious asset has many merits to it that make it an appreciable currency over others. Its property of making trading an easy business and facilitating easy cross-border transactions is what leads to its soaring merits and applicability.

Given its merits, it is crucial to also note that the contentious asset is also, quite fondly, used for nefarious purposes like money laundering and trafficking. It is this use of the currency that makes the authorities hesitant in accepting the better side of the contentious asset.

This gives rise to a pertinent and inquisitive question that every side has two sides to it, with its merit and demerits, thus, why is bitcoin suffering the wrath of the government authorities in India? Well, it is to be noted here that the authority loathes uncertainty and lack of action that comes with the crypto package.

With the nefarious side of the coin, the added disadvantage of not being able to regulate is what adds to the agony of the authorities. Given the anonymous character that the crypto gives to the user, authorities usually find it arduous to track the users’ activities and the user itself.

With unregulated transitions that take place through the contentious assets, the government loses a humungous amount of revenue. Thus, given the merits of the currency, its disadvantages outweigh the positives.

Such antagonizing and aversive attitude of the government can be corroborated by the fact that recently the Union Finance Minister Nirmala Sitharaman has emphatically informed the Lok Sabha that there effectively will be no proposal before the government.

Thus, the proposal recognizing bitcoin as a currency is effectively not on the table. Sitharaman, in fact, also emphasized o the fact that the government does not collect data on bitcoin transactions. This strategically shows that the government has no interest in granting the status to the currency any time soon in the future.

In fact, it is to be noted that in the recent turn of events, the Indian government had got the Indian crypto traders anxious again due to its antagonistic stance against the contentious digital currency. With its introduction of the recent crypto regulation law, many traders were found desperately trying to sell a part, if not all, of their cryptocurrency portfolio.

This was mainly due to the fact that the panic sell-off amongst crypto investors was triggered by the announcement that a crypto bill would be introduced in Parliament’s winter session. What had made the whole scenario all the more concerning and frightening for the traders and investors was the declaration of the fact that the bill mentioned that trading of all private cryptocurrencies would be prohibited.

Though, given the Indian government’s odious stance against cryptocurrency, such a step must not have come as a surprise. But given the speculative, whimsical nature of the market, this led to havoc and anxiety, which led to panic selling in the market. This had effectively led to plunging values in the crypto market, where the prices had fluctuated frequently. Given that speculation can do such harm and lead to such panic, it can be argued, that a complete ban will definitely lead to havoc in the market.

It is to be noted that Bitcoin, which is a digital currency that was introduced in 2008 by programmers, strategically allows people to buy goods and services and exchange money without involving banks.

According to the reports, the speculations remain true as the government actually plans to introduce a bill in this regard. The Cryptocurrency and Regulation of Official Digital Currency Bill 2021 can be introduced in the ongoing session. Given the nature of the bill, it can be conjured that the bill will ban all private cryptocurrencies but might allow the underlying technologies.

But in the pursuit to eradicate the non-conforming, non-perfect aspect of the asset, will the government forgo the positive potential of the currency? Luckily, the answer might come as good news for the investors, as the government plans to roll out its regulated version, CBDC, in the market.

This claim can be corroborated by the fact that the government has effectively received a proposal from the Reserve Bank of India strategically seeking an amendment to the RBI Act, 1934. The proposal is demanding to enhance the scope of the definition of “banknote”. This is being done to include the currency in digital form.

Given the extensive research that is going on in the CBDC, with RBI examining use cases and working of the currency, one can conjure that the CBDC can be a reality in the near future.

CBDC has its own merits if it is introduced in an undisputed, phased manner. The introduction of a CBDC has immense potential to provide significant benefits in the future. These benefits will include such as reduced dependency on cash in the society, reduced settlement risk, and higher seigniorage due to lower transaction costs.

Thus, one can finally state that the phased introduction of CBDC in India will possibly lead to a more efficient, robust, regulated, and legal tender-based payments option for the public which will be an added advantage. Though, it cannot be denied that there are associated risks with such introduction which, in the light of protecting the welfare of the user, need to be carefully evaluated, but given the potential benefits in the future, one can robustly state that something efficient can be born out of the meticulous efforts of the central bank.

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BNPL System – a Boon or Bane?

Credit card and EMI companies are in shackles. All thanks to the recent rise of the BNPL system also known as the Buy Now Pay Later system which is taking the millennials and the young generation by storm.

Gone are the days when people used to pay hefty interest on their borrowing, which was compounded monthly and led to hefty debts. Countering such aversive trends, BNPL has tried to mitigate the woes of working-class professionals with its easy credit policy.

BNPL system on based on the idea of fast credit that is becoming the need of the households given the crippled finances due to the pandemic increased medical expenses, and lower incomes.

To top it all, the festive season too is a major reason for overspending and tremendous use of the BNPL in recent times.

Though one can state that easy credit is the primary reason for the success of the BNPL model, the widespread adaptation of the digital medium around the world for the specific purpose of shopping has also helped BNPL garner much attention around the globe.

Thus, with easy availability through larger internet penetration across the country and easy credit, there has been an immense increase in spending and also a sense of immediate gratification that the BNPL system is offering.

Therefore, with its widespread popularity, one can emphatically state that BNPL has been a tremendous success in recent times.

Having talked about the buyer side, the seller side is experiencing the benefits of the system. This has led various sellers to make the buying process quite seamless for customers by partnering with various financial institutions, thus growing their consumer base at an increasing rate.

Trouble in paradise?

But with no hidden interest rates or fee structure, the model seems to be too good to be true and makes one raise questions like whether the model really is a boon for the millennials or are we missing out on something?

Sure, one can state that BNPL is a revolutionary innovation for the individual who has a stable income and is trying to cover extra expenses.

But what about the millennials, who are increasing users of the system? Turns out, it isn’t much of a viable option for them.

The mere reason for such a statement is that the BNPL system encourages overspending. Given the no interest rate or fee policy, the usage of the BNPL option for finances seems like an enticing option for many millennials, who might be attracted to it even for small purchases.

With numerous small sprees of spending and shopping, there is a larger threat of piling debts than face the millennials.

Another reason that makes the BNPL system all the more enticing for millennials is the limit set by e-commerce entities.

Amazon has set the limit to Rs. 7,500-10,000. Thus, with no limits being imposed by the BNPL system, alternatives like Amazon pay are not opted for.

Similarly, the BNPL services of the e-commerce platform can only be availed when purchasing an on the platform, which is a major deterrent for its users, who opt for BNPL through different companies that encourage overspending.

Thus, given the aforementioned threat and dangerous enticement that the model offers, as the adoption rate grows, so do the risks with it.

The problem that ultimately crops up is that while people are largely aware of how this system works, many are quite unaware of the consequences of late payments.

Thus, no matter how many advantages, one cannot overlook the fact that it emphatically promotes consumer debt through overspending or impulse purchasing.

To add to the narrative, it is to be noted that the interest rates are generally not bound by any consumer credit regulations. Thus, welfare, in the end, can be comprised.

The target audience

Given that millennials are at the risk of exploitation and huge debt what audience can actually benefit from the scheme of easy credit?

It can be stated that the system makes quite some sense for B2B e commerce platforms that can emphatically and effectively provide enhanced BNPL services to their customers to increase their sales.

On the other hand, Wholesalers too who are trying to procure high-priced merchandise or products in bulk can avail the easy credit policy. Similarly, retailers and businesses that procure products or materials before the sale have a large potential to benefit from the scheme.

The future

It is no news that the finances of the economies around the world have been crippled by the pandemic. Thus, as the economies reel from the impacts of the pandemic, one can emphatically state that the future of BNPL firms is unknown.

But given the aforementioned narrative, it can be maintained that the risk of such services remains quite daunting and real for a certain set of customers like millennials.

With the economy still in the nascent stage of recovery, another debt bubble will not materialize well for the economy in the future.

Though in the dystopian world of debt, one can weasel his or her way out by assuring that they save up enough to pay the price of the product in the future.

It is to be noted that fact that BNPL services are relatively a new reform and haven’t reached a wider audience like credit cards and EMI also cannot be denied.

Even though the millennials may be in frenzy about the new, emerging credit option, one cannot deny the fact that the demand for it is likely to go up in the future.

This will especially be true after its robust performance this festive season.

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