Extensions in finance: can the regulator regulate?



Union Bank of India announced home loans at 6.40 percent while Bank of India offers car loan at 6.85 percent. The Lendenclub.com website offers 9.50% mortgage loans and 12.75% car loans. Lendingkart offers 18-25 percent unsecured loans. Cashe (CASHe.co.in) charges 2.5% per month on loans. Just go to the coindcx.com website and one can learn how to invest in cryptocurrency and earn up to 16.25% which does not include price movement.

Wazirx.com does not offer you such offers but provides a platform to process multiple cryptocurrencies. Of course, nothing is guaranteed but these are possibilities. Welcome to the new world of finance which is bringing classic banking to the fore. NITI Aayog is now talking about digital banks as well.

Compare that to putting money in a bank deposit where you can earn 5-6% taxable at best and these options look attractive. Can there be a catch? We do not know because all these entities are registered and fairly transparent in their offers, which is visible to everyone, including regulators. A P2P platform is quite open and hence there can be no risk for borrowers. Crypto exchanges are also working well, and people come in with their eyes open. Also, if they are blooming all over the world, there is nothing wrong here in India. Crypto trading is not illegal and the bill prohibiting or regulating will be discussed in Parliament.

See also: Cryptos, out of sight of regulators

The logical questions to ask would be of the nature of the following: Why would someone have to leave a bank and go to a P2P site and pay almost double the interest rate? The websites say the turnaround time is one to three days which means things are faster. But it is also stated that there is a lot of due diligence when it comes to background, salary, credit history, etc. It all happens online and even the 59 minute loan that the government talked about can be improved here if you are a small business.

Unsecured loans are given which means that collateral is also not required. Can we borrow and run away? This will not be a good idea because a default will block all future borrowing opportunities and since the amounts given are modest compared to the banks, this will be rare. Of course, the model looks good in terms of operation, although the idea of ​​millions of customers paying higher interest may defy logic when alternatives exist.

Financial engineering

Likewise, investing in cryptos is now presented not only as an investment opportunity, but also as a deposit. As an individual we can buy crypto and pay rupees. This money can then theoretically be loaned to others in the form of a cash loan which can be in any currency of a country that allows it. There is also an interest to pay. Does the RBI agree with this, as it means that such a formal system in an informal way allows deposits to be taken by these institutions? It is not known because it seems to be the new engineering done by crypto exchanges where they go beyond the simple offer to exchange these mythical coins.

Will it be a parallel form of financial system that follows separate rules? When the money is lent by a fintech in the form of a personal loan or an SME honor loan, is the end use known? This will be difficult to follow as these loans are for small amounts and the lender has never seen the face of the buyer. Could the borrower just as well channel the money to buy cryptos that offer good yield than deposits? Can it be used for drug trafficking abroad? We do not know. It can be a neat parallel financial system that works with everyone and regulators are watching.

These are questions that arise when this new version of financial engineering comes into play. A question often raised is: should products be authorized before a regulation or code is in place? When the financial crisis hit, it was sure to be cataclysmic. The reason these products flourished was that no one knew what they meant or what damage could be done and therefore there was no regulation. CDOs (Collateralised Debt Obligations) and CDS (Credit Default Swaps), which later became swear words, were presented as miracles of brilliant minds. India was better off because we were clear that without a full understanding of the product, the regulations would not allow such proliferation. It was called a conservative approach, but it worked.

The government and the RBI are still discussing whether to authorize or formalize the cryptocurrency. But several exchanges have appeared, just like these currencies where large investments are made. Some say it could be in the region of ₹ 6-lakh crore. TV channels are now sponsored by these exchanges and they appear to be extremely legitimate businesses. Do investors really know what they are investing in – Bitcoin, Ethereum, Tether, etc.

See also: Explanation: Neo-banks Vs traditional bank

It is an enigma for all central banks and all governments. Recently, the RBI has very carefully crafted rules of engagement with the NBFCs and the ladder-based approach is probably the most pragmatic way to go about it. But the new financial innovations that are officially underway show that regulation will always come much later and lag behind. We saw that MFIs were largely unregulated until the problem of high interest rates and defaults arose, leading to the deployment of tough tactics that eventually opened the door for structures. cohesive regulations. Did the MFI model work with an interest rate greater than 20%? Aren’t some of these P2P platforms doing the same?

There is clearly a customer base for each product. Much like small jewelry stores that primarily sell silverware are a front for lending money that is thriving across the country, with fintech companies charging interest rates on the P2P model, which are double that of those on the P2P model. charged by the formal banking system, should have an access advantage for borrowers, especially since these are small amounts. The model assumes that when loans are small, not all of them will default at the same time.

The financial system is already quite extensive with the proliferation of commercial banks, followed by a plethora of NBFCs and large cooperative banking structure, in addition to payment banks and small financial banks. Then there are the chit funds, nidhis, etc. in the informal sector in addition to the multitude of pawn shops. The new block added are these fintech platforms (which come in the form of core NBFCs). Instead of consolidation, there is an unbridled expansion of intermediation structures. The interdependence of these segments is still difficult to guess and is usually revealed during a crisis. How much can the regulator regulate?

Madan Sabnavis is the chief economist of CARE Ratings. Views are personal



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