Finance and Fintech: Invigorating Investment and Inclusion in India


Good afternoon, Namaste. Executive Director of the Securities and Exchange Board of India, Mr. Prasad, thank you for your kind introduction and warm welcome. Ladies and gentlemen, I am very pleased to be here in Mumbai. I would like to express my gratitude to the National Stock Exchange of India for hosting this event today.

This is my first visit to Mumbai, but it is by no means my first visit to India. I have had the privilege of visiting this beautiful country before. As always, I am deeply impressed by all that I have seen and by the people I have had the pleasure to meet. India and the IMF go back a long way together. India was one of our founding members more than 70 years ago. We have had a strong partnership ever since.

I know that all of you are aware that India has been among the fastest growing economies in the world in recent years. I also know that you all agree that there are a number of challenges remaining to make India’s economy grow stronger, be more inclusive, and more sustainable.

In my presentation today, I will focus on some of the key challenges to raising India’s growth potential, namely, how investment and financial inclusion can be invigorated to boost growth even more (slide 2). In particular, I will address this issue by emphasizing the role of finance and FinTech in boosting investment and inclusive growth.

My main message is that India needs more and better-allocated credit to support investment. To achieve this, India needs reforms to boost efficiency in the banking and financial sector. And FinTech can help by providing better financial services and enhancing financial inclusion.

Now let me start with the need for greater investment, especially private investment (slide 3). While India is one of the global growth leaders, investment has not been as high as desired, also when compared to other countries.

In addition, financial inclusion has been a challenge. Access to finance remains low. Only 13 percent of Indian adults borrow through formal channels.

The Indian authorities have recognized these issues. Indeed, India has made many reforms in recent years to make it more attractive for businesses to expand their operations and raise investment. These include, for example, steps taken by both the Union and State governments to improve India’s business climate. Restrictions on foreign direct investment have also been loosened in various sectors. And “India’s Project Monitoring Group” has been empowered to speed up investment approvals for infrastructure. More reforms, such as to land and labor markets, are needed. But for now, I will focus on how finance can help.

Boosting India’s Financial Sector Efficiency

Let me start with a quick overview of the banking and financial systems, which typically play a key role in helping to raise investment and boost financial inclusion. As part of the IMF’s ongoing assessment of the global economy, the IMF conducts periodic assessments of important countries’ financial sectors. The assessment for India, which we at the IMF call FSAP, was completed a few months ago and published in December 2017 .

The FSAP highlighted the need to boost the efficiency of India’s financial system. Banks play a dominant role, but the efficiency of the sector could be better (slide 4). This is illustrated in the slide that compares the return on assets in India’s banks with those in peer countries.

In addition, asset quality in India has seen a deterioration over the last few years (Slide 5). This is illustrated in the slide that shows the rising share of Indian banks’ non-performing and restructured assets.

The authorities have introduced important measures to address NPAs (slide 6). This includes the recent amendment to the Insolvency and Bankruptcy Code (IBC); the bank recapitalization plan; and the revised resolution framework of stressed assets. The Reserve Bank of India (RBI) recently also announced a simplification of the stressed asset resolution framework. This is a step in the right direction as it focuses on strengthening early identification, monitoring, and supervision of stressed assets.

To have a lasting impact, however, these efforts need to be accompanied by bank governance reforms, especially at public sector banks. Risk management and risk culture need to be strengthened to prevent the recurrence of asset quality problems. There is also a need to improve the efficiency and effectiveness of intermediating savings and to contribute to a recovery of corporate credit, including loans to small- and medium-sized enterprises. We are encouraged by the government’s plans to pursue comprehensive reforms of PSBs alongside the capital injection plan. We encourage the authorities to expand these measures to meaningfully restructure and modernize the sector.

Capital Market Development

So far, I have spoken mostly about the banking system. Being at the Mumbai stock exchange this afternoon, I certainly don’t want to underplay the important role of capital markets in financial intermediation and promoting investment.

India boasts liquid short-term money markets and a large well-developed government bond market. The market capitalization of equity markets is similar to peer countries. The corporate bond market is growing rapidly, although it still remains relatively small.

In this regard, it is noteworthy that several measures have recently been taken to quicken the pace of bond market development. In particular, many of the proposals put forward in 2016 by the H R Khan Committee have been adopted. These include introduction of trading on electronic trading platforms in primary markets; creation of an information repository; adoption of standards for the methodologies used by rating agencies; recognition of brokers as market makers; and sanctioning of investment by foreign portfolio investors in unlisted bonds.

Building on these advances, more can be done to enhance the role of capital markets in promoting investment. A case in point is the authorities’ effort to foster infrastructure finance. New schemes are being rolled out to ease access to corporate bond and equity markets. These look promising.

How FinTech can help

Now, how does FinTech fit within this picture? First, what is Fintech precisely (slide 7)? The concept is new and evolving but, put simply, Fintech is the collection of new technologies whose applications may affect financial services, including artificial intelligence, big data, biometrics, and distributed ledger technologies (DLT) such as blockchains.

In essence, the emergence of FinTech has provided another way to make finance more efficient and inclusive. We know there is a lot of excitement in the air about Fintech. But we can’t be sure how much is real, and how much is hype. As the American futurist Roy Amara put it, “we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” I suspect this will apply to FinTech. Perhaps in five to ten years, we will suddenly realize that the world of financial services has changed beyond recognition! There is a lot at stake for India and other emerging market economies. It’s never too early to get prepared.

Fintech offers the promise of faster, cheaper, more transparent and more user-friendly financial services for millions around the world. The possibilities are exciting.

• For example, artificial intelligence combined with big data could automate credit scoring, so that consumers and businesses can pay more competitive interest rates on loans.

• Another example is “Smart contracts”, which could allow investors to sell certain assets when pre-defined market conditions are satisfied, enhancing market efficiency.

• Other applications can be found with mobile phones and distributed ledger technology. Already, with mobile phones and DLT, individuals around the world could pay each other for goods and services. Ordering tea leaves from Darjeeling might become as easy as paying for a cup of tea next door.

How can FinTech support investment and corporate lending? For one, FinTech can help mobilize more household savings, which in turn will enable a higher level of sustainable investment.

Fintech can also be a powerful tool in overcoming some of the market imperfections that exist in the financial system. As mentioned earlier, the use of artificial intelligence and big data could make information on transaction counterparties more accessible, and facilitate the matching of parties to transactions. With the improved risk assessments, borrowers could benefit from lower risk premia and borrowing costs. The use of FinTech could also reduce transaction costs and the barriers to new entrants, thereby promoting competition. Small- and medium-sized enterprises, which tend to face these constraints more, could see greater access to lending and opportunity for investment.

FinTech and Capital Markets

There is also a link between FinTech and capital markets. Cloud technology, artificial intelligence and machine learning can help strengthen financial controls and reporting, while blockchain technology can facilitate clearing and settlement of securities.

What does this mean for India?

India, together with China, and other countries in the Asia-Pacific region, is among the leaders in FinTech innovation. For example, Paytm, along with its Chinese partners such as Ant Financial, are fundamentally changing the way payment and other financial services are provided.

FinTech has grown rapidly in India, as the country combines a large unbanked and underbanked population with a strong technology and entrepreneurial ecosystem (slide 8). FinTech has been driven by the payments sector, but from a low base, especially compared with other similar emerging markets. There are has some 1,500 FinTech companies, with capitalization expected to grow 1.7 times by 2020. That would place its valuation at $8 billion, according to private sector estimates:

• Digital payments (including digital wallets, P2P transfer applications, and mobile points of sale) account for about 1/3 of the FinTech market;

• Alternative lending is among the fastest growing business segments. A major contributor to the growth is the unmet demand for loans to medium and small enterprises;

• Banking technology solutions are also experiencing strong growth, including B2B products, risk management, and regulatory compliance tools.

In the area of financial inclusion, Jan Dhan Yojana (also known as PMJDY) is arguably the world’s biggest financial inclusion program (slide 9).

  • It enables access to formal bank accounts for large swaths of unserved and underserved. As of February 2018, over 310 million new no-frills accounts have been opened under the program.
  • The Reserve Bank of India has also approved Aadhaar-based biometric authentication, which allows accounts to be opened electronically, satisfying Know Your Customer requirements KYC at banking correspondent locations. This enables financial services companies to do e-KYC checks more economically.
  • Finally, on mobile and other innovative payment systems, the industry expects smartphone users to grow from 150 million in 2016 to about 500 million by 2020. The National Payments Council of India, through the Unified Payments Interface, has leveraged the growing presence of mobile phones to reduce the cost of FinTech infrastructure. The National Payments Council of India also introduced products such as RuPay cards, allowing faster money transfers and improved customer experience. Some 235 million RuPay cards were issued as of February 2018.Next Steps

What next?

While the new technologies are beginning to deliver on the promise of improving access to finance, further steps are crucial to turn access to safe use.

The recent IMF assessment of the financial sector (FSAP) identified key measures to help increase digital payments. It emphasized that when designing and promoting digitization initiatives, it is important to promote both incumbent payment instruments (such as traditional payment cards) and new innovative mechanisms (such as Unique Identity-enabled payments). It supported adopting digital payments via tax rebates. Finally, it called for establishing a National Payments Council to facilitate public and private sector dialogue and inform policy formulation. This can help provide greater regulatory certainty that can encourage innovation.

Indeed, FinTech innovations are posing important challenges to financial regulation and supervision (slide 10). As changes accelerate, policy making will need to be nimble, experimental, and cooperative.

Here I would highlight five lessons learned,

  1. Oversight needs to be reimagined. Regulators now focus largely on well-defined entities, such as banks, insurance companies, and brokerage firms. They may have to pay more attention to specific services, regardless of which market participants offer them.
  2. Rules will be needed to ensure sufficient consumer safeguards, including privacy protection, and to guard against money laundering and terrorist financing.
  3. International cooperation will be critical, because advances in technology know no borders, and it will be important to keep networks from moving to less regulated jurisdictions.
  4. New rules will need to clarify the legal status and ownership of digital tokens and assets.
  5. Finally, regulation should continue to function as an essential safeguard to build trust in the stability and security of the networks and algorithms.

    Having noted these important lessons, this raises the question “How to strike the balance between promoting innovation and preserving financial stability and consumer protection?” Some economies are taking a creative and far-sighted approach to regulation—by establishing “FinTech sandboxes”. These initiatives are designed to promote innovation by allowing new technologies to be developed and tested in a closely supervised environment. Firms can conduct pilot trials of innovative financial services and products in a timely and cost-effective manner before these are launched on a larger-scale. Sandboxes typically allow for certain regulatory or licensing requirements to be relaxed, adapted, or waved on a case-by-case basis, while including some form of safeguards to mitigate the risks. The “Regulatory Laboratory” in Abu Dhabi and the “Fintech Supervisory Sandbox” in Hong Kong SAR are such examples.

    The international community is debating actively how to meet the new challenges. I am sure the Indian authorities will bring their own perspectives to this debate and contribute actively to the global effort.


    To conclude, the outlook for the Indian economy is bright. This is good news because the stakes are high, especially for India’s young and rapidly growing population. Boosting investment and inclusion remain among the key challenges. In this regard, financial sector reforms are crucial to raise credit and investment. And FinTech can provide innovative ways to enhance financial efficiency and inclusion. The potential for expanding FinTech in India is high, but implementation needs to be carefully crafted to deal with the risks associated with these new technologies.