The Reserve Bank of India (RBI) is exploring the introduction of a policy framework for digital banking, fintech and BigTech this fiscal as the involvement of large technology companies in the financial sector brings in systemic risks.

While encouraging innovation, the central bank is also factoring in the emerging risks in the fintech segment. "Greater use of technology accentuates the concerns related to cyber security. Further, the involvement of BigTechs in the BFSI segment also brings along the systemic risks. All of the above have implications for financial stability and it is the endeavour of the Reserve Bank to mitigate such risks through careful choice of technology and frameworks," the RBI said in its annual report for 2021-22.

The RBI’s approach will be to balance innovation with regulation, without compromising on any of the principles of risk management.

With increasing impact of the fintech segment on both macro (financial stability and cyber security) and micro levels (consumer protection and financial inclusion), it is important to facilitate innovation while also bringing regulatory order in the fintech space, the Reserve Bank said.

The RBI has also assumed non-conventional central banking role through its initiatives such as regulatory sandbox, establishment of the Reserve Bank Innovation Hub, and conducting hackathon, among others. 

The central bank has also set up a fintech department in January.

Meanwhile, RBI also set up a fintech department in January. The traditional financial landscape has witnessed a fundamental change in its structure and way of functioning, mostly driven by the widespread adoption of technology in the last decade.

RBI also advocated the need for legislations and regulations for the fintech sector. So far, though, the sector is not as tightly regulated as traditional banks and even non-bank financiers.

"Fintech has disrupted the banking, financial services, and insurance (BFSI) segment in its way of product structuring, back-end analytics, delivery of services, etc. As expected, such innovation first disrupts the market and once it establishes its constructive role, the regulators and authorities step in to regulate the space to nurture the innovation in a sustainable manner and to also mitigate any associated risks," the RBI said in the annual report.