India's central bank argues against making fintechs into banks

Every regulator that supervises both banks and their competitors eventually has to answer the same question: whether the rules follow the institution or the activity. India's central bank gave its answer this week, and then produced a proposal that shows how hard the answer is to apply.

Speaking at the Global FinTech Fest in Mumbai on Friday, Reserve Bank of India Deputy Governor Shirish Chandra Murmu said the objective is not to make fintechs resemble banks but to ensure that entities performing critical financial functions manage their risks. Business Standard reported his formulation: "Similar activities creating similar risks should, wherever appropriate, face similar regulatory treatment."

That is the activities-based principle stated plainly, and the qualifier in the middle of it is doing real work. Wherever appropriate is where the argument happens, because two firms performing a similar activity rarely carry an identical risk once funding, scale and customer base are accounted for.

The principle is attractive to regulators because it closes arbitrage. If a firm can offer credit without a lending licence by describing the product differently, the rulebook has a hole in it, and the hole widens as the product succeeds.

It is uncomfortable for firms because proportionality is asserted at the level of principle and applied at the level of detail. A capital requirement calibrated for a deposit-taking institution does not become proportionate by being described as risk-based.

The live example arrived on the sidelines of the same event. Murmu said the central bank is reviewing feedback from non-banking finance companies on a proposal that they should offer only term loans with a pre-determined repayment schedule.

Under that proposal, a sanctioned limit could not be restored once repaid. That single provision would effectively bar flexi-credit products, in which a borrower draws down, repays and draws again against the same line.

The revolving line is not a packaging choice. It is the product for a category of borrower whose need is irregular — a merchant with seasonal inventory, a household with uneven income — and a term loan with a fixed schedule does not serve that need at all.

The supervisory case for the change is that a permanently available line is harder to assess than a closed-end loan. Outstanding balances understate exposure, and a borrower who never fully repays looks current on every metric while the debt persists indefinitely.

The commercial consequence is direct. The proposal may affect some fintech companies' short-term revenue models, because the fee and interest economics of a revolving line differ from a term loan in timing as well as in amount.

Both positions the RBI has taken this week are defensible, and they pull in opposite directions. Proportionate regulation says match the rule to the risk; the term-loan proposal removes a product category from everyone regardless of how well an individual lender manages it. Which one describes Indian fintech regulation will be settled in the consultation, not the speech.