RBI Annual Report 2022: What’s in it for fintechs?

The Reserve Bank of India has stated in its Annual Report, released today, that it is also looking at the phased introduction of Central Bank Digital Currency (CBDC), and has announced the setting up of 75 digital banking units in as many districts in 2022-23.
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The newly created fintech department of Reserve Bank of India (RBI) is exploring a policy framework for digital banking, fintech and big techs, and will finalise its vision, mission and strategy documents as a part of its 2022-23 agenda, the Annual Report issued by the central bank today, May 27, stated.

Under the roadmap laid down by ‘Vision and Strategy Document on FinTech’ (Utkarsh), the department is also looking at the phased introduction of Central Bank Digital Currency (CBDC), and has announced it will facilitate setting up 75 digital banking units in 75 districts of the country during 2022-23.

The newly created fintech department was set up on January 4, 2022, to exclusively focus on the evolving fintech segment, and to identify opportunities and challenges while promoting innovations. All matters related to the facilitation of constructive innovations and incubations in the fintech sector, which may have wider implications for the financial markets/sector and also fall under the purview of the RBI, will now be examined by the department. 

Further, issues related to inter-regulatory coordination and international coordination on fintech would fall in its domain. 

“The RBI has assumed a non-conventional central banking role through its initiatives such as regulatory sandbox, establishment of RBIH, conducting hackathon etc. Having a single touchpoint (fintech department) for all the issues related to facilitation of constructive innovations and incubations in the sector will certainly bring the required convergence needed to have a unified approach regarding the sector,” it said. 

The central bank is also factoring in the emerging risks in the fintech segment. “Greater use of technology accentuates the concerns related to cyber security. Further, the involvement of big techs in the BFSI segment also brings along systematic risks. All the above have implications for financial stability and it is the endeavour of the RBI to mitigate such risks through careful choice of technology and frameworks, while providing impetus to fintech in a wide array of useful applications in the financial industry.” 

Reserve Bank Innovation Hub (RBIH)

In order to foster innovation in a sustainable manner and through an institutional set-up, the Reserve Bank Innovation Hub (RBIH) was set up as a wholly-owned subsidiary of the Reserve Bank in March 2022. 

Headquartered in Bengaluru, RBIH has an independent board with eminent members from industry and academia. 

“The hub will collaborate with financial sector institutions, technology, industry and academic institutions and will coordinate efforts for exchange of ideas and development of prototypes related to financial innovations for creating an ecosystem that would focus on promoting access to financial services and products and would further financial inclusion,” the report stated. 

It would also develop the required internal infrastructure to promote fintech research and facilitate engagement with innovators and startups. 

Regulatory Sandbox cohorts 

The central bank informed that under the first cohort of the Regulatory Sandbox on “Retail Payment”, products and services encompassing technologies like Near Field Communication (NFC), sound waves and Interactive Voice Response (IVR) were tested. All six products were found viable within the boundary conditions defined during testing. 

In the second cohort with the theme “Cross-Border Payments”, eight entities underwent testing. The third cohort with the theme “MSME Lending” was opened in October 2021. The theme of the fourth cohort, “Prevention and Mitigation of financial frauds,” was also announced. “On tap” application facility for themes of the closed cohort was also enabled. 

Hackathons: HARBINGER 2021

The RBI had launched its first global hackathon—HARBINGER 2021—in November 2021. It said the hackathon has received encouraging responses from domestic and international contestants. “The outcomes are expected to provide innovative solutions for the financial sector,” it said. 

It is also testing and evaluating entities under the third and fourth cohorts of the regulator sandbox on “MSME lending” and the “prevention and mitigation of financial frauds”. 

NBFC framework deadlines 

A revised regulatory framework for non-banking financial companies (NBFCs) - called the ‘scale-based regulation’ - has been put in place, considering their growing size, complexity and interconnectedness. The new regulatory structure for NBFCs comprises four layers based on their size, activity, and perceived riskiness, and encompasses different facets of regulation covering capital requirements, governance standards and prudential regulation, amongst others, and will be effective from October 1, 2022.

Also, NBFCs have been allowed time till September 30, 2022, to put in place the necessary systems to implement the provision relating to the upgrade of NPA accounts. 

Edited by Anju Narayanan