Hello everyone, welcome to the 109th edition of The Pattern, a weekly newsletter where we dive into the world of economy, technology, and finance. Today, we’ll focus on learning to fail and failing to learn. Let’s get started.  

The cryptography of fintech regulation  

Every day in the world of finance and fintech seems like a teachable moment for the regulator and the constituents of this sector. Over the last few years, the regulation for banks, NBFCs and fintechs has truly evolved and expanded in scope, detail and expectations.  

This is not an accident. It’s rather an outcome of a precocious regulator that put in the work to actualise frameworks which can keep pace with the technological revolution and the metamorphosis of the industry.  

Now, we have gone from the point where nobody knew what fintech is to a point where the regulator prescribes even the sequence in which different loan offers must be presented to a borrower if they’re applying through a digital marketplace. It's a good thing to have clarity and it’s a great thing to have precise instructions.  

However, there’s a more complex side to this as well. And that is the current mood in the sector where both regulated entities and unregulated fintechs feel pressure to understand what’s on the RBI’s mind and mend it before the regulator is forced to issue a diktat.  For instance, almost all the recent circulars – about loan aggregation, digital lending, key facts statement, KYC etc. – were once the subject of public conversations by the policymakers and regulators.

This isn’t about draft guidelines or public consultations, but rather speeches, addresses, industry meetings and views expressed in public forums that one would usually not give the same weightage as an official order, of course.  However, it seems like a prudent thing now for all to be paying careful attention to public remarks, reading between the lines and carefully chiseling out imperfections. This is not necessarily a bad thing, just an onerous task.  

The regulator seems to carefully calibrate a motion to set the stage for all major announcements. It usually starts with casual mentions, public speeches, industry meetings, consultations and ends with a circular with an order to comply. This, some in the RBI, call ‘expectations management’.  

“Central banks have realised that policy-making can be more effective if the changes are predictable. Now, there is credible amount of literature which points out that successful ‘expectations management’ by the central banks through effective and credible communication can increase the effectiveness of policy measures... For serious policy issues and monetary policy, it is important that the context, rationale and setting of decision making is placed before the audience to enable them to appreciate the outcome,” said M. Rajeshwar Rao, Deputy Governor, Reserve Bank of India earlier this year in a public address.   

On that note, in a recent speech, another RBI Deputy Governor has cautioned NBFCs against over-relying on stiff rule-based underwriting algorithms that might bring “grief” later.  

“While automation can enhance efficiency and scalability, NBFCs should not allow themselves to be blinded by these models. It is crucial to recognize that rule-based credit engines are only as effective as the data and criteria upon which they are built. Overreliance on historical data or algorithms may lead to oversights or inaccuracies in credit assessment, particularly in dynamic or evolving market conditions. Therefore, NBFCs must maintain a clear-eyed perspective on their capabilities and limitations, supplemented by continuous monitoring and validation of credit scoring model,” said Swaminathan J, Deputy Governor, Reserve Bank of India at an NBFC industry event.  

Even though these seem like cautionary words, the fact that it echoes Governor Shaktikanta Das’ thoughts as well implies that it could very well be a bell tolling to apprise us of what’s to come.  This is all from me this week. As always, I'll leave some reading recommendations and interesting data below.  

Reading list   

1. RBI looks at asset reconstruction companies amid a flood of allegations  

2. It’s time India gets a FraudStack  

3. NBFCs' profitability to moderate on higher borrowing costs: Moody’s  

4. What's the new RBI proposal giving cold sweats to lenders?  

5. Kotak Mahindra Bank plans to hire 400 engineers to ramp up tech transition  

Between the digits    50% - Estimates by research agencies suggest that bank credit growth could slow down by as much as 50% compared to the previous fiscal on account of RBI’s curbs and cautionary stance adopted by most banks towards unsecured lending.   6%-7% - HDFC Bank said recently that it’s spending 6%-7% of its budgets on technology annually. This is in line with broader trends as banks continue to upgrade their technology stacks to modernise their offerings.   85% engineers – SBI plans to hire almost 12,000 freshers in FY25 and 85% of them are engineering graduates . The nation’s largest bank seems intent on technology innovation and the engineering workforce will prove to be a natural fit for its ambitions.   

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to always get all updates.

Cheers,

Mayank