A research released on Tuesday by the Centre for Advanced Financial Research and Learning (Cafral) stated that there are sufficient grounds for regulators and policymakers to strike a balance between lessening risks in the traditional banking system and promoting growth and product innovation in the non-bank sector.
Because of the high caliber of NBFCs’ and FinTech companies’ third-party lending methods and underwriting procedures, regulators should be extremely vigilant and maintain active, ongoing oversight.Cafral is a non-profit organization that was founded by the Reserve Bank of India (RBI) with the aim of advancing research in the fields of finance, macroeconomics, and public policy. It commenced operations in January 2011.
According to the research, there are worries that the traditional banking industry may experience losses as a result of internet lending activity.
The higher the spillover, the stronger the connections between the online and traditional lending industries.
As of right now, there is no reason to panic because digital lending makes up a minor portion of the whole credit market. But because platforms are so easy to scale, the industry has been expanding nonlinearly. if a result, if digital lending expands, it may be necessary to evaluate the stability risks that it might present to the whole economy in the near future,” it stated.
Furthermore, the Cafral research stated that any losses in digital lending have significant ramifications for credit availability and financial inclusion for the impoverished and marginalized elements of society, who make up a significant market group segment that digital lending targets.
As they grow in significance on a systemic level, NBFC loan growth can provide hazards to the financial sector, as demonstrated by the events that followed the 2008 Global Financial Crisis (GFC).”
The analysis suggests that the interest rate these non-banks charge their target consumer segment may be a potential conduit for such a systemic issue.
In addition to these elements, FinTech NBFCs and similar suppliers serve as a barrier between customers and NBFCs.
It added that central banks worldwide are changing regulations to strike a balance between preserving sound financial conditions for the macro economy and fostering an atmosphere that encourages innovation and the growth of the non-banking sector. “Adding this additional layer of third-party vendors can further obfuscate risks in the financial system,” the statement stated.
It’s interesting to note that the survey discovered a high correlation between the expansion of domestic rapid payment platform UPI (unified payments interface) and fintech loans. In contrast, there is less of a correlation between UPI growth and scheduled commercial bank (SCB) lending.
“Per capita fintech lending increased by 4.6% and per capita SCB lending increased by just 1.5% in response to a 10% increase in UPI transactions. When growth rate is taken into account, the correlation is much stronger: a 10% increase in the UPI growth rate is linked to an almost 8.1% increase in fintech growth, as opposed to a 6.9% rise in SCB lending growth “.