India’s E-Wallet Lending Curbs Signal More Fintech Regulatory Tightening: Fitch
Recent regulatory changes should result in a more stable and robust fintech industry over time, Fitch Ratings said.
Recent regulatory changes by the central bank will challenge the operations of some financial technology startups, but should result in a more stable and robust fintech industry over time, according to Fitch Ratings.
Last week, the Reserve Bank of India had asked non-bank prepaid instrument issuers to stop loading wallets and other prepaid instruments through credit lines. The clarification forms part of an overall tightening of digital financial services regulation, the ratings agency said in a note on Thursday.
To be sure, the RBI’s clarification that prepaid payment instruments—a licensing category that includes e-wallet operators in India—can only be loaded via cash, bank accounts, and credit cards issued by regulated entities does not prevent digital finance platforms from offering loans backed by banks and other non-bank financial companies. It, however, restricts certain business models under which PPI operators had taken on customer credit risk by effectively extending unsecured personal credit, for example through ‘buy now, pay later’ schemes and ‘quasi-credit cards’.
As such, the clarification may hit the business plans of a number of fintech firms offering PPIs, including mainstream operators. But more established and sophisticated companies will benefit in the longer term if tighter regulation encourages the exit of less scrupulous firms from the sector, the note said.
Greater fintech regulation is likely in the next 12-24 months, reflecting the sector’s growing presence in the financial system, Fitch Ratings said.
Mobile wallets accounted for 25% of all point-of-sale payments in India in 2021, according to estimates by WorldPay, from only 5% in 2019. An RBI working group on digital lending estimated that there were approximately 1,100 apps offering loan products in the country in 2021, with close to 600 illegal loan apps—although, according to Fitch, digital lending remains small relative to total system credit at present.