Reserve Bank Deputy Governor T Rabi Sankar on Wednesday pitched for similar regulation for both banks and non-bank entities like fintechs if they are undertaking the same activity.
If fintechs are allowed to carry out similar services without the tighter regulations governing banks like capital adequacy, know your customer (KYC) requirements, leverage and liquidity norms, there is a risk of creating inefficiencies and risks associated with regulatory arbitrage, Sankar said at an event organised by Business Standard.
"The fundamental point is that any entity providing banking services needs to be subject to similar regulation as banks. An arrangement where regulation of non-bank and fintechs are not aligned to the regulation of financial firms, regulated financial firms like banks or their subsidiaries offering similar services will create inefficiencies and risks associated with regulatory arbitrage," Sankar said.
He cited the recent example of prepaid instruments being used to extend credit lines sans a proper licence, and also hinted at Big Tech's attempts at garnering deposits as cases of "regulatory arbitrage" which the RBI is concerned about and will act against.
"If we want to avoid the inefficiencies caused by differential regulations for similar activities across different entities, a non-bank undertaking banking functions needs to be licensed and regulated like a bank. Without the licence, it should not be allowed to undertake banking activities," he added.
He argued that this will not kill innovation and suggested that banks can tie-up or outrightly purchase such technologies to ensure that customers get the best services which are available in the market.
No regulator has the luxury of letting innovation disrupt the financial system in the hope that the market might reach its own equilibrium eventually, he made it clear.
"RBI's data localisation guidelines are intended to secure users' payment data, RBI's warnings on cryptocurrencies and its public stance was motivated as much by policy sovereignty as by the need to protect uninformed investors," he added.
"It is a distinct possibility that ambiguous or equivocal stance of regulators or authorities globally has contributed to the surge in demand and valuation in the last two years," he said, adding that the red flags raised by RBI has helped restrict the damage in India