Fintech’s potential for boosting financial inclusion among Micro, Small and Medium Enterprises (MSMEs) was recently highlighted in a report by the Steering Committee on Fintech. The report was submitted to the Ministry of Finance following its formation per the announcement in the 2018-19 Budget Speech. The committee set forth a range of recommendations, including enhanced use of cash-flow based financing for MSMEs, encouragement of drone and remote sensing technology in the insurance sector, and adoption of cutting-edge digital technologies to streamline banking processes.
Embracing Cash-flow Based Financing
The Committee has suggested that the Reserve Bank of India (RBI) explore the option of cash-flow based financing for MSMEs. This form of lending, where financial institutions provide loans backed by the borrower’s previous and projected cash flows, would exempt firms from immediate collateral requirements. Credit ratings are crucial in this method, potentially expediting the loan process due to the absence of collateral appraisal.
Insuring through Tech-enabled Means
To aid risk reduction in insurance, the report envisions greater use of drone and remote sensing technology for tasks such as crop area assessment, damage evaluation, and location analysis. Insurance companies and lending agencies are urged to adopt these advancements to improve efficiency and accuracy. The Department of Financial Services is also recommended to collaborate with public-sector banks for reducing instances of fraud and enhancing security.
Automation and Fintech in Banking
Owing to the tremendous potential of Artificial Intelligence (AI), cognitive analytics, and machine learning, these technologies are touted as significant opportunities for automating the backend processes of banking operations. The National Bank for Agriculture and Rural Development (NABARD) is encouraged to take swift steps towards creating a credit registry for farmers, with a particular emphasis on fintech adoption.
Legal Framework and Consumer Protection
With increasing digitization, customer protection in the fintech space has never been more critical. Thus, the necessity for a comprehensive legal framework to safeguard consumers is stressed, focusing both on fintech and digital services.
| Technology | Description |
|---|---|
| RegTech | Helps in managing regulatory processes through technology, including monitoring, reporting, and compliance. Predominantly uses cloud computing technology for businesses to comply efficiently and inexpensively. |
| SupTech | Serves supervisory agencies in digitizing reporting and regulatory processes, resulting in improved monitoring of risk and compliance at financial institutions. |
Virtual Banking and Unified Fintech Platforms
The suitability of a virtual banking system is proposed to be explored by the Department of Financial Services and the Reserve Bank of India. Virtual banks operate without physical branches while delivering comprehensive retail banking services like loans, savings accounts, card issuance, and payment services digitally. Furthermore, the report advocates for a common fintech platform catering to Micro Units Development and Refinance Agency (MUDRA) loans, small saving schemes, pension schemes, and provident fund. The reform of peer-to-peer (P2P) lending platforms is also suggested.
The Way Forward
An Inter-Ministerial Steering Committee on fintech applications is slated to be set up by the Ministry of Finance for effective implementation of this report. The Committee represents a continuous commitment to fostering fintech’s role in enhancing financial inclusion and efficiency in India.
