OPINION: As the entire financial services industry is fast evolving, equally agile should be the financial regulators

Jan 1, 2022, 11:30 IST

Banking is one of the oldest commercial and trust-based activities that has existed over the centuries. India has had its form of banking for many centuries, as evidenced from our scriptures. Insurance as a sector has been mentioned in the writings of Manu (Manusmrithi), Yajnavalkya (Dharmasastra) and Kautilya (Arthasastra). The writings describe pooling of resources that could be redistributed in times of calamities such as fire, floods, epidemics and famine. Ancient Indian history has also preserved the concept of insurance in the form of marine trade loans and carriers’ contracts. The Indian financial sector has withstood socio-economic shifts, ideological battles, policy upheavals. Gladly, the need for a safer and prudential financing aspect remains staunch.

India at present

Just in the past 3 decades, we have seen various forms of tech adoption in the Indian finance sector. Currently, the Indian population comprises the millennial and Gen-Z consumers and irrespective of whether they are in urban centres or semi-urban or rural, their daily lives revolve around their smartphones and devices. As the entire financial services industry (including banking, non-banking financial companies (NBFCs), digital lenders, insurance, asset and wealth management, pension funds, fintechs) are fast evolving with newer offerings to serve this client-base, equally agile and more proactive should be the financial regulators.

What could be the year ahead?

Financial regulators would push for a stronger balance sheet of entities they oversee. This could mean increased regulatory oversight of weaker entities, increased stress-test dash boarding, nudged mergers and acquisitions (M&A) activities, and need for finance players to raise additional capital.
Consumer protection is crucial. But the ability to balance that principle, with the speed of digital innovation will need much faster adoption, by financial regulators, of their own digital capabilities and tools. Also, in instances where consumer greed is the issue, blaming the industry players could be avoided.
Financial regulators will bring in ideas for product communication to be simple. This can reduce the heartburn that comes with financiers showing off their complicated jargons and obscure and repetitive paperwork.
All the financial regulators using an Unified Data format (say to a standard like XBRL) can enable faster and preventive understanding of systemic issues. If they can trust that the data has not been compromised with, in the journey from transactional system to reporting, they can focus on the data itself, for speedier decisions.
Regulators have always had to get used to the newer waves of technology shift and to fine-tune their regulations in sync with market mechanisms. Some of our financial regulators are far ahead in understanding digital finance, than their peers. Hopefully, the rest will also catch up the learning curve quickly.
Our financial services regime is licence-based. Reassessing each of these licences from utility, impact and consumer need perspective this can bury some of the legacy baggage that we carry meaninglessly.
Lateral hires of private sector talent into regulatory policy development, policy operations and regulatory supervision space could be a new addition to bring in additional knowledge, and increased market engagement.
Regulators will get tougher on any infringements. After all, financial business is all about consumer trust.
Cyber and digital related safety aspects will take importance in the regulatory agenda.
Increased sandbox models, especially around cashless transactions and digital finance will accelerate the need for shaping regulatory narratives.
Gear up for TechFin as global giants are increasing their hold on the technologies, consumer engagement in the space of payments, lending, banking and insurance.
Prepare regulations for Web 3.0. That would necessitate financial regulators to build a framework on what it could mean for ‘future of finance’.
With Indian economic growth, and the importance of it being a large consumer market and investment destination, our regulators will have a say in the global financial arena. In this aspect, hopefully we might see a protectionist effect for domestic players.
For investors as well as the finance entities, issues around environmental, social and governance (ESG) are having higher attention. The finance regulators will bring detailed scrutiny in this space, as India moves towards its own net zero goals in tune with the United Nations’ sustainable development goals (SDG).