Gs paper-3
Syllabus: Indian Economy and issues relating to planning, mobilisation of resources, growth, development and employment.
Context:
RBI governor has asked for regulation of Bigtech and Fintech companies. For this, With an aim to provide secure and affordable e-payments, the Reserve Bank of India (RBI) has come up with a document ‘Payments Vision 2025’
Document ‘Payments Vision 2025’
As part of its Vision 2025, the RBI will attempt
- regulation of big tech and fintech in the payments space
- explore guidelines on payments that involve BNPL(buy now pay later) services
- work towards the introduction of CBDC (central bank digital currency)
- seek inclusion of rupee in continuous linked settlement (CLS) (CLS provides protection for cross-currency settlement in 18 currencies)
Why the need for such regulation?
- To avoid systemic concerns: Big Tech’s play in lending activities using customer data and sophisticated algorithms can lead to “systemic concerns” like over-leverage and inadequate quality assessment of borrowers.
- Other Concerns: The entry of firms like Google, Amazon and Meta, which are referred to as Big Tech, also poses concerns related to competition, data sharing, data protection and operational resilience of critical services in situations where banks and NBFCs utilise their services.
- Also, risks relating to cybersecurity, software development limitations in transaction capacity, the privacy of customer data and data security.
- Last year’s Financial Stability Report, had raised some broad concerns, including about such companies’ products accepting deposits for some regulated financial sector entities.
- Sensitive user data: Big-tech and fintech companies offer sophisticated services which use sensitive data from various sources to issue loans to users, including those not having collateral or credit history.
- Issues of lending through digital channels, including mobile apps: Issues related to unfair practices, data privacy, documentation, transparency, and breach of licensing conditions.
- Multiple regulators: The fintechs’ require multiple regulators to work together because a single technology like blockchain or de-centralised finance (DeFi) can have multiple uses coming under different watchdogs’ ambit.
- Anonymity: DeFi poses unique challenges to regulators as it is anonymous. The lack of a centralised governance body and legal uncertainties can make the traditional approach to regulation somewhat ineffective.
What needs to be done?
- Authorities and regulators have to strike a fine balance between enabling innovation and preventing systemic risks.
- Guidelines: RBI will soon be issuing guidelines to make digital lending ecosystems “safe and sound while enhancing customer protection and encouraging innovation”.
- Need for entity-based and outcome-based regulation.
- Globally coordinated regulatory approach and inter-regulatory coordination: This will enable comprehensive assessment of such activities, activities and mitigation of risks.
- Use of technology: Use of artificial intelligence and machine learning to determine the creditworthiness of a borrower.
- Transparency: The methodology of algorithms underpinning digital financial services has to be “clear, transparent, explainable and free from exclusionary biases”.
- In the age of technological changes, banks should not just work like banking service firms but like technology companies.
Practice Questions:
Q. With reference to digital payments, consider the following statements: (UPSC CSE 2018)
- BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.
- While a chip-pin debit card has four factors of authentication, the BHIM app has only two factors of authentication.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: A
Q. Which of the following is a most likely consequence of implementing the Unified Payments Interface (UPI)? (UPSC CSE 2017)
(a) Mobile wallets will not be necessary for online payments.
(b) Digital currency will totally replace the physical currency in about two decades.
(c) FDI inflows will drastically increase.
(d) Direct transfer of subsidies to poor people will become very effective.
Answer: A
Q. There is a growing support for either regulating big tech companies such as Facebook and Google. Discuss the reasons. Should they be broken up? Comment. (15M)
Q. Explain the dominance of global technological giants and in what way it is a cause of concern for Indian tech companies and start-ups? Also suggest way forward to address the situation. (15M)
