Regulators Need To Balance Non-Bank Innovation & Bank Risk Mitigation

A recent report by the Centre for Advanced Financial Research and Learning (Cafral) emphasises the need for a balanced approach by regulators and policymakers in the financial sector. The report, commissioned by the Reserve Bank of India (RBI), underscores the importance of striking a balance between fostering growth and innovation in the non-bank sector while managing risks within the traditional banking system.

The report raises concerns about the quality of underwriting processes and third-party lending practices in Non-Banking Financial Companies (NBFCs) and FinTech firms. It calls for heightened vigilance and continuous surveillance by regulatory bodies to ensure the stability and integrity of these lending practices.

One of the key concerns highlighted in the report is the potential for losses from online lending activities to spill over into the traditional banking sector. The report indicates that the stronger the connections between traditional and online lending, the greater the spillover risk. While the share of digital lending in the overall credit landscape is currently small, its rapid and non-linear growth, driven by scalable platforms, necessitates a close assessment of the stability risks it may pose to the broader economy in the near future.

Furthermore, the report points out that digital lending often targets marginalised and economically vulnerable sections of society, making any losses in this sector particularly significant for credit availability and financial inclusion among these groups.