Hi,

Welcome to the 115th edition of The Pattern, a weekly newsletter where we delve into the latest in the world of finance, technology and economy. Let’s get started.

Over the last few months, I’ve written extensively on the Reserve Bank of India and its increasing scrutiny of fintechs – be it the crackdown on Paytm or its draft guidelines on digital lending service providers.

These steps arose from concerns around unchecked unsecured lending, non-compliance, and poor customer due diligence.

However, this is far from being a one-sided, ‘do what I say’ equation. In fact, this past week, the regulator announced a groundbreaking initiative that’s set to boost communication between the fintech sector and the central bank.

‘Finquiry’ is an exclusive, two-hour window where fintechs can visit the RBI’s fintech department in Mumbai to discuss their queries and seek clarifications on regulatory changes. The window opened on 26th June and will be available on the last working Wednesday of every month from 3-5 PM.

This one-of-a-kind, direct channel for communication should go a long way in helping fintechs navigate complex regulatory frameworks, and it truly reflects RBI’s commitment to fostering innovation in a secure and compliant environment.

In other news, according to the RBI’s latest Financial Stability Report, NBFCs were the largest net borrowers of funds from the financial system – and a breakup of their gross payables reveals that a bulk of these funds were sourced from scheduled commercial banks. In fact, borrowing by NBFCs from banks rose to 22.6% in March as opposed to 19.8% in March 2021.

I bring attention to these numbers especially since in just November last year, the RBI increased the risk weight on all bank lending to NBFCs by 25%, citing concerns around the rapid rise in bank lending to NBFCs.

Soon after the move, RBI Governor Shaktikanta Das spoke about the risks posed by concentrated borrowing linkages between non-bank lenders and mainstream lenders.

It’s safe to say that these latest numbers will have RBI on the edge of its seat – because the failure of any NBFC could act as a solvency shock to their lender and result in contagion. After all, relying on a single funding source isn’t smart financial sense.

One only needs to think back a few years to the collapse of three NBFCs, IL&FS, DHFL and HDIL in 2018, and the chain of events it set off – the collapse of Punjab & Maharashtra Cooperative Bank and Yes Bank, as well as a fresh NPA crisis. SBI and LIC pumped in money to save IL&FS and Yes Bank. DHFL, HDIL and PMC went into bankruptcy.

I’m not catastrophising and predicting an economic collapse – but I do think that NBFCs could use some help in finding supplemental sources of funds – as they have been asking for all this while.

That’s all from me this week. As always, leaving some interesting reads below.

Reading List:

• Fintech lenders have high delinquency levels in small value loans says RBI

• Global fintech revenue rose 14% in last two years

• Embedded finance to be $320-billion revenue market by 2030: BCG

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