Reserve Bank of India governor Shaktikanta Das on Friday said the central bank will soon issue guidelines to make digital lending ecosystem safe and sound.

Raising concerns over the entry of Big Tech into financial services, Das warned it could potentially be another source of disruption.

Large tech companies have an enormous amount of customer data which has helped them to offer tailored financial services to entities and individuals lacking credit history or collateral, the RBI governor says.

Companies whether from e-commerce, social media and search engine platforms, ride hailing and similar businesses have started to offer financial services in a big way on their own or on behalf of others. Even the banks and other lenders are sometimes utilising platforms provided by fintech companies in their internal processes for credit risk assessment, Das adds.

Such large scale use of new methodologies in credit risk assessment can create systemic concerns like over-leverage, and inadequate credit assessment among others, the RBI governor warns, stressing that authorities and regulators have to strike a fine balance between enabling innovation and preventing systemic risks.

Big Tech also pose concerns related to competition, data protection, data sharing and operational resilience of critical services in situations where banks and NBFCs utilise the services of Big Tech companies, the central bank governor cautions.

“These concerns can also materialise in sectors other than financial services. The provision of financial services through the digital channel, including lending through online platforms and mobile apps, have brought in issues relating to unfair practices, data privacy, documentation, transparency, conduct, breach of licensing conditions, etc.,” Das says, adding that the Reserve Bank will soon issue suitable guidelines and measures to make the digital lending ecosystem safe and sound.

The approach to regulation of fintech could be by way of activity-based regulation wherein similar activities are treated similarly, regardless of the legal status or nature of the entity undertaking the activity, Das says. “It could also be entity-based regulation which requires that regulations are applied to licensed entities or groups that engage in similar and specified activities, such as deposit taking, payment facilitation, lending, and securities underwriting, etc. The approach could also be an outcome-based regulation by setting out some basic, common and technology or business model-neutral outcomes that entities must ensure.”

Speaking on inflation, Das says that the monetary policy committee consciously decided to tolerate inflation during Covid-19. Had the monetary policy been tighter, the economic damage would have been “disastrous”, he adds.

On De-centralised Finance (DeFi), Das points out that framework poses unique challenges to regulators as its anonymity, lack of a centralised governance body, and legal uncertainties can make the traditional approach to regulation ineffective.

In May, the Reserve Bank had warned that the involvement of Big Tech companies in the banking, financial services and insurance sector brings systemic risks.

Follow us on Facebook, Twitter, YouTube & Instagram to never miss an update from Fortune India. To buy a copy, visit Amazon.