Context: The Reserve Bank of India (RBI) recently directed banks and non-banking financial companies (NBFCs) to increase their risk weightage against loans from 100 per cent to 125 per cent.

What are Fintechs?

• Fintech,  a combination of the terms “financial” and “technology,” refers to businesses that use technology to enhance or automate financial services and processes.

Fintech Companies in India and their Common types

• Payment: These offer digital payment solutions, such as mobile wallets, online payment gateways, and peer-to-peer (P2P) payments. Ex-Bharatpe
• Lending: These offer digital lending solutions, such as personal loans, business loans, and credit cards. Ex-CRED
• Insurance: These offer digital insurance solutions, such as health insurance, life insurance, and car insurance. Ex-Digit Insurance
• Investment: They offer digital investment solutions, such as stock trading, mutual funds, and cryptocurrency trading. Ex-Zerodha

Fintech Companies in India: Significance 

• Fintech Sector: India is home to the third-highest number of fintechs globally, with more than 9,000 fintechs, holding a 14 per cent share of Indian start-up funding. 
• Adoption Rate:  As per the Economic Survey 2022-23, fintech companies in India witnessed an 87% adoption rate across varied user bases as opposed to the global average rate of 64%.
• Digital Transactions: Fintech companies in India account for 70 per cent of digital payment transactions, marking a twofold rise in their share during FY22 compared to FY19. 
• Financial Inclusion: More than 10 million people and small businesses gained access to savings accounts, insurance, investment options, and credit facilities through mobile-based services and digital platforms. 
• Democratising Lending Process: Peer-to-peer lending platforms are democratizing lending, providing individuals and small businesses with access to funds without the need for traditional financial institutions.
• Rise in Public Investment: Investment platforms and robo-advisors are making investing in stocks, mutual funds, and other financial instruments more accessible.. 

Government Support for Fintech Companies in India

• JAM Trinity: JAM Stands for Jan Dhan Yojana, Aadhaar and Mobile connectivity.
• India Stack: It is a set of APIs that allows governments, businesses, startups and developers to utilize unique digital Infrastructure to solve India’s hard problems towards presence-less, paperless, and cashless service delivery. 
• UPI (Unified Payments Interface): The advanced mobile app-based payment system is the multiplier force behind the Fintech revolution in India.
• Digital Rupee: Central Bank Digital Currency (CBDC) or digital rupee is an electronic version of cash helping accelerate the growth of the FinTech market in India.
• Open Network for Digital Commerce (ONDC):  It supports the digitization of small businesses by linking them with a payments and logistics infrastructure. 

Challenges Associated with Fintech Lending

• Cyber Attacks: The increasing digitization of financial services has increased the risks of cyber threats.
  • In 2022,  a total of 13.91 lakh cases were reported.

Continue Reading: NCRB Report 2022 On Crime In India

• Illegal Digital Lending: The ease of access to fintech loan apps has led to a rise in numerous instances of harassment,  unethical recovery practices and suicide linked to unregulated lending apps.
• Financial Illiteracy: There is a lack of necessary digital exposure and adequate digital knowledge to understand the risks associated with online transactions. 
• Infrastructural Issues: Due to network/ connectivity problems in rural areas, online transactions are more prone to interruptions and slower response times, leading to security threats.
• Data Privacy Issues: The RBI has mandated that all financial institutions conduct Know Your Customer (KYC) verification for each customer. 

Way Forward

• Strengthening the Cybersecurity Infrastructure: Fintech companies in India can collaborate with local law enforcement agencies to address cyber threats specific to the region. 
• Improving the Cybersecurity of payment infrastructure in rural India:  Fintech applications should have robust security features, including multi-factor authentication, encryption, and biometric recognition.
• Addressing Infrastructural issues: Given the intermittent internet connectivity in rural areas, fintech companies in India should enable offline access to financial services simultaneously. 
  • This will ensure that users can perform essential transactions with limited or no internet connectivity..
• Digital Literacy Programs: Fintech companies in India should invest in digital literacy programs to educate rural users about the risks and best practices associated with online transactions. 
• Creation of a unified regulatory framework on connected lending: As suggested by RBI, this must be created to regulate connected lending – where a borrower might influence the lender’s decision – for all its regulated entities.
• Compliance Program for Fintechs: Fintech companies in India should develop a compliance program to ensure they comply with all applicable laws and regulations. 

Conclusion:

Fintech companies in India have done a lot to include more people in the financial system and make things digital. But, to keep growing in a good way, they need to deal with issues like keeping things safe online, fixing infrastructure problems, and helping people understand money better.

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