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The Reserve Bank of India (RBI) is concerned about the systemic risks emanating from the involvement of large technology companies in the financial sector, and is therefore exploring the possibility of introducing a policy framework this fiscal for digital banking, fintechs, and such BigTechs.
The central bank said while encouraging innovation, it is also factoring in the emerging risks in the fintech segment. “Greater use of technology accentuates the concerns related to cyber security," RBI said in its FY22 annual report issued on Friday.
All such risks, RBI said, have implications for financial stability, and its endeavour is to mitigate them through careful choice of technology and frameworks.
“To handle the above issues, RBI’s approach will have to balance innovation with regulation, without compromising on any of the principles of risk management," it said.
To be sure, this is not RBI’s first caution against risks emerging from large tech firms entering the fintech space. In a speech last September, deputy governor T. Rabi Sankar had said systemic risks, operational risks, and risks affecting competition are of prime importance when dealing with large financial market infrastructure entities or BigTech.
On Friday, the regulator said with increasing impact of fintechs on both macro aspects such as financial stability and cybersecurity, and micro aspects such as consumer protection and financial inclusion, it is appropriate to facilitate innovation while also bringing regulatory order.
To deal with unique developments in the sector, RBI said it has also made conscious efforts to reinvent its primary role as innovation facilitator.
“RBI has also assumed non-conventional central banking role through its initiatives such as regulatory sandbox, establishment of the Reserve Bank Innovation Hub, conducting hackathon, among others," it said.
Meanwhile, RBI also set up a fintech department in January. The traditional financial landscape has witnessed a fundamental change in its structure and way of functioning, mostly driven by the widespread adoption of technology in the last decade, it said.
RBI also advocated the need for legislations and regulations for the fintech sector, which so far, is not as tightly regulated as traditional banks and even non-bank financiers.
According to the regulator, fintech has disrupted the banking, financial services, and insurance (BFSI) segment in its way of product structuring, back-end analytics and delivery of services. Although such innovations initially disrupt the market, but once it establishes its constructive role, the regulators and authorities step in to regulate the space to nurture innovation and mitigate any associated risks, RBI said.