Big Tech entry threatens the stability of the banking system: RBI

The Financial Stability Report (FSR), released by the Reserve Bank of India (RBI), raised concerns about the entry of large tech companies like Amazon and Google into the country’s financial system, claiming that tech companies could undermine the banking system by circumventing financial sector regulations.

The RBI report, which is the collective assessment of the Financial Stability and Development Board (FSDC) sub-committee on risks to financial stability and the resilience of the financial system, reflects on contemporary issues relating to development and regulation. of the sector.

RBI said that the entry of large tech companies into digital financial services would raise important policy questions. To address these issues, RBI suggested better assessment of their operation and entity-based prudential regulations.

“Specifically, concerns have grown about a level playing field with banks, operational risk, issues too big to fail, challenges for antitrust rules, cybersecurity and data privacy,” he said. RBI said in its semi-annual financial stability report.

Big Tech generally refers to the five biggest IT companies, including Google, Amazon, Facebook, Apple, and Microsoft.

While recognizing that major technologies offer a wide range of digital financial services and have a substantial footprint in the payment systems, crowdfunding, asset management, banking and insurance of several advanced and emerging market economies The central bank has pointed out three unique challenges that these great technicians pose.

First, they operate in many different (non-financial) industries with sometimes opaque global governance structures. Second, they have the potential to become dominant players in financial services and third, large technologies are generally able to overcome scale limitations in the provision of financial services by exploiting network effects, RBI noted.

Currently, UPI payments are dominated by PhonePe, owned by Walmart, which has a market share of over 40%, and Google Pay, which has 37-38%. The other key players are Paytm, Amazon Pay and WhatsApp Pay, which launched a few months ago.

The National Payments Corporation of India (NPCI) had already introduced a volume cap for a third party application provider or TPAP (payment applications like PhonePe, Google Pay, Amazon Pay, etc.) as of January 1, 2021. TPAPs existing ones that have exceeded the volume ceiling as on December 31, 2020, will have a period of 2 years from the date of entry into force to comply with the provisions. On the other hand, banking applications (Paytm, Axis etc.) are exempt.

RBI noted that sustained political support, favorable financial conditions and the growing momentum for immunization are needed to foster an uneven economic recovery.

Political support has helped consolidate banks’ financial positions, contain non-performing loans, and maintain global solvency and liquidity.

Domestically, the ferocity of the second wave of the corona pandemic has shaken economic activity, but monetary, regulatory and fiscal policy actions have helped reduce the solvency risk of financial entities, stabilize markets and maintain financial stability.

The risk-weighted assets (CRAR) ratio of listed commercial banks (SCBs) increased to 16.03% and the provision coverage ratio (PCR) stood at 68.86% in March 2021 .

The macro stress tests indicate that the gross non-productive assets (GNPA) ratio of SCBs could drop from 7.48% in March 2021 to 9.80% by March 2022 in the reference scenario; and 11.22 percent in a severe stress scenario, although SCBs have sufficient equity capital, both at the aggregate and individual level, even under stress.

Going forward, as banks respond to the demand for credit in a recovering economy, they will need to strengthen their capital and liquidity positions to protect against potential strains on their balance sheets, the report adds.

About Ruben V. Albin

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