While India has had an average savings rate of more than 30 per cent during the eleventh and twelfth five-year plans, the overall savings rate is on the wane of late (see Figure 1). The trend of household savings is no different. Also, gross household financial savings as percentage of gross national disposable income (GNDI) has virtually stagnated as can be made out from Table 1. Even the jump in savings rate as a per cent of GNDI in 2016-17 was largely due to demonetisation.Additionally, this does not reflect any structural shift in the propensity of Indians to save via financial markets. This is clearly reflected in the fall of currency holdings and rise of deposits, respectively, for the year 2016-17.
To add insult to injury, the banking sector, which has been the most reliable creditor in the country has had its lending capacity constrained owing to the twin balance sheet problem. The slowdown in bank credit growth is clearly discernible from the downward trend in Figure 2, which depicts year-on-year (YoY) change in bank credit.
The aforementioned facts indicate, that India has an abysmally low level of financial depth, and last mile financial connectivity. The failure of regulators, legacy firms, and traditional channels of finance in reaching the masses can be gauged from the fact that RBI issued no banking licenses from 2003 to 2014 and then issued two in 2014. Further, two-thirds of the people outside of insurance coverage blame it either on unaffordability or ignorance of the concept of insurance (RBI report of household finances).
In such a scenario, with a possible credit crunch looming over the economy, FinTech with its ability to get custom made financial innovations into the marketplace and usher in additional household savings into the system has assumed greater importance than ever before. It, however, would require an enabling environment in order to optimally do so.
Indian start-ups have a natural propensity towards FinTech and theyhave been fairly successful in their ventures. Without any substantial, if any, regulatory support, start-ups have managed to carve out a niche for themselves as is clearly visible from the number of deals they have struck and amount of funds they have raised (see Figure 3 and 4). While the start-ups raised USD 656 million across 70 deals in 2015 and USD 620 million across 91 deals in 2016, they were successful inraising USD 2,078 million across 64 deals in just the first half of 2017.
The point then being, that there is no dearth of potential financial innovation in India and regulators should recognise this and facilitate the streamlining of firms’ operations. Sadly, this is a far cry from the current scenario.
The following excerpt cited in RBI’s report on household finances, gives a glimpse of the regulatory maze existing in India, and the difficulties that start-ups face in navigating it.
“We had a product that falls under three different regulators, including the telecom regulator. No one wants to be the first to go-ahead. We did not know who (sic) to approach. No way for regulator to say you must proceed, test, and check with us again after 6 months. Sandbox would have given the clarity we needed.” Micro-insurance start-up (pg 110, RBI report on household finances)
The regulators on their part should therefore do away with the prejudices and stigma they have attached to financial innovations and products of financial engineering. They should proactively seek out solutions, which would allow them to develop the FinTech space while preventing any systemic and specific risk from creeping into the larger financial systems of the country.
Establishing a regulatory sandbox in the country is one way to end the constant antagonisation of financial innovation by regulators. A regulatory sandbox in the simplest terms and as defined by Financial Conduct Authority (FCA), the conceiver of this idea, is a
“‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question.” (pg2 ,FCAregulatory sandbox report)
The quarantined and safeguarded space of regulatory sandbox allows for the testing of financial innovation while preventing any blow back from impacting the financial system at large. Regulatory sandbox, thereby, takes care of concerns of both the reluctant regulators and innovators struggling to find their place in the financial eco-system.
The performance of FCA’s regulatory sandbox projectin its first year, as elucidated below, bears testimony to its effectiveness when implemented in the right manner.
- Out of the firms that participated in the first cohort of the program, around 90 per cent proceeded towards wider market launch. Thus, the primary objective of allowing more innovative ideas to permeate the market in a cost effective and timely manner was achieved.
- Being a part of the program helped bolster investor confidence by reducing regulatory uncertainty. This was achieved owing to the active participation of regulatory bodies in the process of development of the financial product. At least 40 per cent of the firms participating in the first cohort managed to raise funds during or after the program.
- Testing in a live environment helped firms adequately gauge the response of consumers to various business models and pricing strategies. This in turn allowed firms to fine tune their product as well as their strategies, based on the feedback received.
- During the sandbox process, technology and cyber resilience reviews of firms were conducted. This allowed firms to put the strength and feasibility of their technology to the test, while at the same time, shielding consumers from harm.
From the experience of regulatory sandboxes in pioneer countries, its prowess in delivering innovations and new usage of legacy technologies to the market is fairly clear. Therefore to give a fillip to the Indian FinTech sector, an expeditious setting up of a financial regulatory sandbox in India managed by a committee of India�s major financial sector regulators is urgently required.