Speaking at the Global Fintech Fest (GFF) 2024, Shaktikanta Das, Governor of the Reserve Bank of India, proposed five priorities for the future of the financial system. The five pillars include financial inclusion, digital public infrastructure, consumer protection and cyber security, sustainable finance, and global integration and cooperation. Following are the key insights from his address.
With India growing as an economic superpower in the coming years, it becomes pertinent to map out a direction for the financial sector as India gears up for its one hundred years of independence in 2047. Achieving this level requires a vision of how to build the financial environment for the future. It is, therefore, important for policymakers to understand that the future of financial systems in India will be determined by the growth of technologies, the nature of regulatory structures, and the geo-political environment.
For sustained growth, one has to cultivate a culture that expects disruption and welcomes change, but in a calculated manner. Banks and other financial firms and FinTech startups need to become much more responsive, with flexible structures and solid processes to seize the potential while minimizing the threats. It will also ensure that the country’s financial sector, which includes banks, NBFCs, FinTech companies, the regulators, and the government, is robust and progressive.
The first of these priorities is digital financial inclusion. Reserve Bank of India’s Financial Inclusion Index has increased from 53.9 in March 2021 to 64.2 in March 2024, which shows the improvement in the outreach of financial services. This has been made possible through the implementation of the PradhanMantri Jan DhanYojana (PMJDY), which has seen the opening of 530 million bank accounts inclusive of women and the rural populace.
However, as the financial sector evolves, there is a growing need to harness the efficiencies of digital financial inclusion. This entails advocating for and facilitating the provision of safe, innovative, and convenient products and services in the financial sector for the unserved and underserved demographics. The features that are inherent in digital financial inclusion, including the ability to scale and cost-effectiveness, are the reasons why this is an important area for the next twenty years.
The emerging players in this shift are the FinTech firms that provide solutions like digital payment platforms, micro-finance services, and affordable insurance products. With the help of mobile banking applications, digital wallets, and online lending, FinTech companies can offer the required services for people, including those who live in rural areas. Also, data analysis and AI integration will help develop bespoke and effective financial products that meet the needs of different groups of people.
The second priority is DPI or Digital Public Infrastructure. DPI includes frameworks such as digital identity, UPI, and other targeted payment solutions. These frameworks increase the effectiveness of the financial system by increasing compatibility, disclosure, and affordability. While India is still experimenting in this area, it will be essential to address new issues that are likely to come up, such as fraud, cybercrime, and data protection.
One such effort in this regard is the Reserve Bank’s pilot on the Unified Lending Interface (ULI) that seeks to provide seamless end-to-end digital credit using consented data. The complete launch of ULI and the further internationalization of UPI will be a leap forward in the development of India’s DPI. Such efforts are in line with a larger vision of using advanced technologies such as blockchain and Artificial Intelligence to increase the security and effectiveness of the financial sector.
With the increase in the use of technology in the Indian financial sector, it is important that there is proper cybersecurity. The level of expectations for consumers nowadays is to have personalized, efficient, and integrated financial experiences due to the proliferation of digital services. But it also comes with new challenges, such as the issue of privacy and protection from cybercrimes.
The DPDP Act of 2023 for India is one of the most critical legislations on consumer protection. This legislation includes provisions like data minimization and purpose limitation that require organizations to collect only that data which is necessary and to use it only for specific purposes. The DPDP Act gives the consumer authority over his/her personal information, thus boosting confidence in the use of digital platforms.
To effectively counter the new threats, financial institutions must acquire the most advanced technologies for threat identification, assessment, and neutralization. Another factor that is equally important for the creation of a safe digital economy is the increase of cybersecurity awareness among consumers and employees. The RBI, as a regulator of the sector, is keen on encouraging innovation while at the same time maintaining stability in the financial sector.
Sustainable finance is the fourth focus area of the government of India in line with the country’s long-term objective of maintaining stability in the economy as well as conserving the environment. The RBI has been active in providing sustainability measures for the financial sector, such as sovereign green bonds and the green deposits framework. These initiatives are intended to promote the funding of projects that will help to support sustainable development and encourage people to act responsibly to the environment.
Still, there are problems, for example, with the scaling of the green bond market and the identification of the real, positive, and significant impact of financed projects. That is why the use of technology may have a significant impact on these challenges. For example, the use of blockchain technology can help increase the transparency of green bond issuances while the use of artificial intelligence and big data analytics can help in evaluating the risks and opportunities of green investments.
In the future, FinTech companies will play a key role in the further development of transition finance, climate finance, and nature-based solutions. India has the potential to enhance its transformation towards a sustainable and climate-proof economy by making use of the opportunities of technology.
The fifth priority is to strengthen global integration and cooperation. India has been active in multilateral forums and bilateral treaties for the promotion of economic relations. Improving the infrastructure within the global financial system such as the international payment systems will remain a major area of concern in the future years.
India has a well-developed financial system and a strong IT background, which makes it possible to consider the country as a global center for FinTech and digital businesses. Strategic partnerships, international cooperation, and the creation of institutions of excellence in technology and innovation will be critical in the advancement of this agenda. The RBI’s endeavors to make UPI a global payment platform have gained momentum, with countries like Nepal, Singapore, and the UAE as some of the most promising examples.
The last component of India’s FinTech plan is the regulatory architecture. It is now clear that there needs to be a well-coordinated and sustainable growth of FinTech that is well supported by regulation. In the recent past, the RBI has come up with several regulatory directives, including digital lending, cybersecurity, and digital payment security control.
One of the favoured methods of attaining this balance is through self-regulation specifically within the FinTech industry. Self-regulatory organizations (SROs) are made of participants in the industry, who understand the various dynamics in the sector, and hence can offer tangible and efficient solutions to the regulators. The RBI’s affirmation of SROs for the FinTech sector is one such positive step in this regard that guarantees that the regulations are progressive and robust.
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