Hello everyone, 

Welcome to the 77th edition of The Pattern, a weekly where we unpack and delve into the rumblings from FinTech, economy, and finance. Let’s get started. 

Once upon a time, there was a banking regulator that shut down several billion dollar companies in one fell swoop of a diktat that closed what many would call a regulatory  ‘loophole’. This led to VC dollars turning into ashes and other companies in the sector learned an important lesson - their best businesses can sometimes be only as strong as the regulator’s afternoon nap. 

And when the regulator awakens, it’s anybody’s guess if even a single firm not abiding by the book will see the light of the next day’s sun. 

This story is mostly mythical but it’s an important context to what seems to be happening in the Indian FinTech space right now. The Reserve Bank of India has been hard at work to try and shine its regulatory light on as many new spaces as possible - be it digital lending, underwriting, outsourcing of IT, OCEN, credit on UPI, and whatever else seems to catch the fancy of VCs and the news cycle. 

However, it certainly cannot reach everywhere and it’s not surprising that the central bank would very much like its workload to be lighter. This can only happen if: 

a) FinTechs stop innovating (and thus don’t step on regulatory boundaries) or  b) FinTechs elect a class monitor, of sorts, and listen to them 

RBI Governor Shaktikanta Das knows option A is too much to ask for and hence, is putting heels in motion for a self-regulatory framework to evolve in the FinTech space. 

“Regulators play a critical role in addressing arbitrage, ensuring compliance with existing laws, and adapting regulations to technological advancements…the most critical role, however, has to be played by FinTechs themselves. They must proactively adopt high standards of governance,” Das said in his speech at the Global Fintech Festival in Mumbai last week. 

He added that FinTechs must establish a Self-Regulatory Organization to establish effective governance standards for the market participants. His main concerns were around evolving best practices, compliance with data protection, and curbing instances of mis-selling. 

Das’ comments come as a unique breather from a regulator that’s mostly been seen lately as hyperactive and overprescribing in its approach when it comes to FinTech and especially, digital credit. 

This, however, isn’t a contradiction. It’s basically the regulator doing its job effectively to curb critical issues such as fake lending apps or usurious practices through its iron fist. And for the rest, it’s letting the industry take a stab first. Of course, if the self-regulation doesn’t work, there’s always…bona-fide regulation. 

But, self-regulation is generally a great idea. It enables a fledgling sector like FinTech to function under light-touch governance by ensuring that regulations are created and driven by the industry itself rather than policymakers who can rarely be found out of touch with the cutting edge. 

At the same time, it also tends to lend legitimacy to various businesses, innovations, and products that might otherwise suffer from regulatory uncertainty. With self-regulation, mostly everyone gets to participate in setting benchmarks and those are held accountable across the industry without preferential treatment - good news for innovators, bad news for fly-by-night operators. 

Self-regulation, though, is neither new or groundbreaking. It has worked remarkably well for India’s once-errant microfinance sector. It has worked well globally too for fast-evolving industry niches. And FinTech might be India’s second big experiment with SROs. 

Currently, there are many bodies that already exist in the form of industry associations - from IAMAI’s FinTech Convergence Council to the Digital Lenders’ Association of India to the FinTech Association for Consumer Empowerment (FACE). 

It’s expected that either these or upcoming collectives officially get the SRO status from the RBI and the regulator can then focus on dealing with an association rather than squabbling FinTechs constantly banging at its doors for licenses, approvals, clarity, and most of all - ‘regulatory clarifications’. 

And, the industry is already rooting for SROs. 

“I am absolutely for it and there is nothing better than self-governance. Why should even a regulator get an opportunity to point a finger if the industry is well-behaved,” said Paynearby MD, CEO Anand Kumar Bajaj. 

Another interesting outcome that FinTechs expect is ‘responsible innovation’, according to Upasana Taku, co-founder of MobiKwik. 

This is a pivotal moment in the FinTech world where association, collaboration, and self-discipline might pave the way for a sustained period of value creation. The gold rush isn’t going anywhere. 

This is all from me this week. As always, leaving some interesting data and reading recommendations for you. 

Between the digits 

13.2% - Credit growth is expected to moderate to 13.2% in the current fiscal year as compared to 15%+, according to ICRA analysis. The rating agency doesn’t predict any worsening in NPAs though. 

16% fall - The share of loans to new-to-credit customers has fallen from 29% in FY19 to just 13% in FY23. 

68% - Kotak Mahindra Bank’s digital platform ‘Kotak fyn’ drove 68% of all corporate banking transaction s. The platform has processed transactions worth more than Rs 26,000 crore so far. 

Reading list

1. How FlexiLoans grew quickly yet profitably

2. Facing recovery challenges, digital lenders reduce exposure to new-to-credit customers

3. RBI’s new mandate for secured loans and returning documents 

4. AU Small Finance Bank plans microloan foray, open to acquisition

5. FinBox CEO Rajat Deshpande on how to go from confusion to conclusion in credit decisioning