Union Bank of India has advertised for home loans at 6.40 per cent while Bank of India is offering an auto loan at 6.85 per cent. The website of Lendenclub.com offers home loans at 9.50 per cent and car loans at 12.75 per cent. Lendingkart offers unsecured loans at 18-25 per cent. Cashe (CASHe.co.in) charges 2.5 per cent per month on loans. Just go to the website of coindcx.com and one can learn how to invest in cryptocurrency and earn up to 16.25 per cent which does not include price movement.

Wazirx.com does not give you such offerings but provides a platform for dealing with several cryptocurrencies. Of course, nothing is guaranteed but these are possibilities. Welcome to the new world of finance which makes conventional banking passe. NITI Aayog is talking now of digital banks, too.

Contrast this to putting money in bank deposit where you may earn a mundane taxable 5 to 6 per cent at best and these options sound attractive. Can there be a catch? One does not know as all these are registered entities and quite transparent in their offerings which is there for all people, including regulators to see. A P2P platform is quite open and hence there can be no risk for borrowers. Crypto exchanges also are functioning well, and people enter with their eyes open. Besides, if they are flourishing across the world there can be nothing amiss here in India. Crypto trading is not illegal and the Bill to ban or regulate will be discussed in Parliament.

Also see: Cryptos, far from the regulators’ glare

The logical questions to ask would be in the nature of the following— why should anyone move away from a bank and go to a P2P site and pay almost double the interest rate? The websites say the turnaround time is one to three days which means things are faster. But it is also stated that there is a lot of due diligence done in terms of one’s background, salary, past credit record, and so on. All this happens online and even the 59 minutes loan that the government spoke of can be bettered here if you are an SME.

Unsecured loans are given which means that collateral is also not required. Can one borrow and run away? It won’t be a good idea because a default will block all future borrowing opportunities and as the amounts given are modest compared with banks, this will be rare. The model of course, sounds good in terms of operation, though the idea of millions of customers paying higher interest can defy logic when alternatives exist.

Financial engineering

Similarly investing in cryptos is now being touted not just as an investment opportunity, but also a deposit. As an individual, we can buy a crypto and pay rupees. This money can then theoretically be lent to others as a loan in cash which can be in any currency of a country which allows the same. There is an interest, too, being paid. Is the RBI okay with this as this means such an informally formal system allows deposits to be taken by these establishments? One does not know because this seems to be the new engineering done by the crypto exchanges where they go beyond just offering trading in these mythical coins.

Will this be a parallel form of financial system which follows separate rules? When the money is lent by a fintech company as a personal loan or a SME unsecured loan, is the final use known? This will be hard to track as these loans are for small quantities and the lender has never seen the face of the buyer. The borrower could just as well channel the money to buy cryptos that offer a good return as deposits? Can it go for drug trading overseas? One does not know. This can be a neat parallel financial system that runs with everyone gaining and the regulators watching.

These are issues that come up when this new version of financial engineering has come into play. A question often raised is should products be allowed before a regulation book or code is in place? When the financial crisis struck, it was cataclysmic for sure. The reason why these products thrived was that nobody knew what they meant or what damage could be caused and hence there was no regulation. CDOs (Collateralised Debt Obligations) and CDS (Credit Default Swaps), which became bad words subsequently, were touted as being miracles from brilliant minds. India was better off because we were clear that without full understanding of the product, regulation would not permit such proliferation. It was called a conservative approach, but it worked.

The government and RBI are still talking of whether to allow or formalise crypto currency. But several exchanges have come up as have these currencies where large investments are being made. Some say it could be in the region of ₹6-lakh crore. TV channels now have running sponsorship by these exchanges, and they look as being extremely legitimate businesses. Do investors really know what they are investing in — Bitcoin, Ethereum, Tether etc?

Also see: Explainer: Neo-banks Vs traditional banking

This is a conundrum for all central banks and governments. Recently, the RBI quite painstakingly brought out rules of engagement with NBFCs and the scale-based approach is probably the most pragmatic way to go about it. But the new financial innovations that are formally running show that regulation will always come much later and will be behind the curve. We have seen that MFIs had been largely unregulated until the problem surfaced with high interest rates and defaults leading to strong-arm tactics being deployed which finally opened the doors for cohesive regulatory structures. The MFI model worked with an interest rate of above 20 per cent being charged? Aren’t some of these P2P platforms doing the same?

There is clearly a customer base for every product. Just like the small-time jewellery shops which deal mainly in silverware are a front for money lending that thrives across the country, fintech companies charging interest rates under the P2P model, which are twice of what the formal banking system charges, must be having advantage of access for the borrowers, especially, as they deal with small amounts. The model works on the assumption that when loans are small, all will not default at the same time.

The financial system already is quite over-extended with commercial banks proliferating, followed by a plethora of NBFCs and the large cooperative banking structure, besides payments banks and small finance banks. Then there are chit funds, nidhis, etc in the informal sector besides the multitude of money lenders. The new block getting added are these fintech platforms (which come as base-level NBFCs). Instead of consolidation, there is unbridled expansion in structures of intermediation. The inter-connectedness of these segments is still hard to guess and usually gets exposed when there is a crisis. How much can the regulator regulate?

Madan Sabnavis is the Chief Economist at CARE Ratings. Views are personal