Date: 28/03/2023
Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Key Phrases: Fintech Sector, Digital Ecosystem, Bull Run, Unified Payment Interface, E-Rupee, CAGR, Financial Inclusion Index, QR Codes, Buy-Now-Pay-Later, Commercial Banks, Cultural.
Context:
- The fintech industry, which has experienced a global bull run for
over a decade, is currently facing a perfect storm.
- With recessionary concerns looming, rising interest rates, and the shift towards quantitative tightening, the era of unsustainable business models and imprudent, unprofitable expansion appears to be coming to a close.
Fintech in India:
- Despite the current headwinds faced by the global fintech industry, India appears to be well-positioned to strengthen its position in this space.
- Critical innovations such as the Unified Payment Interface (UPI) and the e-Rupee (CBDC) are expected to drive growth in digital payments, digital lending, insur-tech, retail investing, neo-banking, and embedded finance.
- It is estimated that Indian fintech is likely to grow at a CAGR
of 31% and reach $1.3 trillion by 2025.
- The current scenario in India is conducive to such growth, with the widespread availability of affordable smartphones, no-frills bank accounts, national digital identity management, and frictionless acceptance based on QR codes.
Challenges for Fintech in India:
- In recent times, the regulatory focus in India has been on digital lending firms that bypass KYC, target financially unsophisticated borrowers with predatory loans, or offer buy-now-pay-later schemes underwritten by non-banking entities.
- Additionally, digital payment apps remain opaque on how they monetize user and transactional data, and digital payment frauds continue to plague senior citizens.
- As such, the fintech industry in India needs to embrace good
governance and address the challenges faced by consumers.
- The current funding winter can provide a breather for thoughtful fintech leaders to re-evaluate their business models and adopt good governance practices.
About Financial Inclusion Index
- The Reserve Bank of India has constructed a composite Financial Inclusion Index (FI-Index) to capture the extent of financial inclusion across the country.
- The FI-Index has been conceptualised as a comprehensive index incorporating details of banking, investments, insurance, postal as well as the pension sector in consultation with Government and respective sectoral regulators.
- The index captures information on various aspects of financial inclusion in a single value ranging between 0 and 100, where 0 represents complete financial exclusion and 100 indicates full financial inclusion.
- The FI-Index comprises of three broad parameters (weights indicated in brackets) viz., Access (35%), Usage (45%), and Quality (20%) with each of these consisting of various dimensions, which are computed based on a number of indicators.
- The Index is responsive to ease of access, availability and usage of services, and quality of services, comprising all 97 indicators.
- A unique feature of the Index is the Quality parameter which captures the quality aspect of financial inclusion as reflected by financial literacy, consumer protection, and inequalities and deficiencies in services.
- The FI-Index has been constructed without any ‘base year’ and as such it reflects cumulative efforts of all stakeholders over the years towards financial inclusion. The FI-Index will be published annually in July every year.
The Future of Fintech in India:
- India has been uniquely positioned to foster financial inclusion through fintech, catalyzing more financial inclusion in the last decade than a century of traditional banking that preceded it.
- However, RBI's Financial Inclusion Index stands at a mere 56.4
out of 100, indicating ample opportunities for growth in this area.
- Furthermore, India is awash with entrepreneurial ambition, making it a fertile ground for fintech innovation.
- With affordable smartphones in the hands of citizens, a robust digital public infrastructure on the cloud, and a regulatory regime striking a fine balance between enforcing rules and fostering innovation, the future of fintech in India appears to be bright.
Conclusion:
- India's fintech industry appears to be on a strong growth trajectory, with critical innovations and a favorable environment supporting this growth.
- However, challenges related to regulations and consumer protection need to be addressed for the industry to thrive sustainably.
- Moreover, fintech's potential to promote financial inclusion
remains untapped, presenting ample opportunities for growth.
- With its entrepreneurial spirit, India is uniquely positioned to lead the way in fintech innovation, and the future of this industry in India appears to be promising.
Source: The Hindu BL
Mains Question:
Q. Elaborate on the growth potential of the Indian fintech industry in the near future and the factors that contribute to its growth. Also, analyze the challenges confronted by the industry and suggest solutions to address them. (250 words).
