r gandhi : fintechs and virtual currency inaugural speech by mr r gandhi, deputy governor of the reserve bank of india, at the “ fintech conference 2017 ”, organized by ficci, iba and nasscom, mumbai, 1 march 2017. * * * i am very glad that iba, ficci and nasscom are organizing this conference as a platform for innovation and collaboration with upcoming and promising ( picup ) fintech. technology and banking have a long close association. both have been benefitted immensely by this association. technological developments have been changing the way the banks and financial institutions and their customers interact. these developments have created opportunities for new entrants, not necessarily new bankers, to disrupt traditional business models and penetrate new markets. the plethora of technological products and services have helped emergence of fintech companies who offer different ways of doing traditional services, that too in more efficient ways. from the time the concept of money was understood, the concepts of lending and borrowing came into existence. however, the organised way of lending and borrowing happened when the prototypes of modern banks were established some 700 years ago. banks undertook another service i. e., the remittance service. the mega trends in the fields of information and communication technology have redefined banking and banks. actually it is not redefinition, but de - definition. banking is no longer what a bank does ; it is also what a non - bank does. banks are no longer those entities who do banking exclusively ; now others, the non - banks also do banking. chunking of banking is the norm ; and for undertaking each of these chunks, there are some specialist entities who perform only those chunks. payment service providers, p2p services, p2b services, sme financing, consumer retail financing, disintermediation, crowd funding, open ended mutual funds, money market mutual funds, deposit alternatives, trade financing, invoice financing, bill discounters, bill collectors, credit referrals, account aggregators, interest free products, syndicators, investment bankers, mfis, co - ops, hfcs and credit rating agencies are some of the entities who chipped away chunk after chunk of banking. is there an element of banking that remains the exclusive privilege of banks? the chunking away of banking from the banks has given enormous business and growth for these non - banks. with their specialisation and focussed service rendering, they are able

very popular because the rbi has moved away from a focus on the wpi to a focus on cpi. even the market for cpi indexed iibs has been lukewarm. the moderate investor interest perhaps reflects the disinflationary bis central bankers ’ speeches environment, where inflation protection is less sought after. also, unlike the more taxprotected gold monetization bonds, the cpi indexed iibs are not fully tax protected against inflation. going forward, a level playing field on taxes is warranted for all instruments, so that instruments do not gain favor simply because they get better tax treatment. the lesson from these examples is that financial innovation needs support, not to create tax or regulatory arbitrage, but so that appealing features are encouraged. innovation also requires tinkering, to modify what does not work until something more appealing can be found – the first versions of interest rate futures were not attractive, but later versions have succeeded. this is why the rbi has moved to a sandbox approach, where we are liberal towards early product innovations so long as they are not clearly problematic, regulating more carefully only when interest picks up and the product looks like it might become of systemic importance. finally, an important function for the regulator in encouraging financial innovation is to create the necessary infrastructure. for instance, a number of financial contracts are structured off benchmarks. rbi has encouraged the setting up of the financial benchmarks india pvt. limited ( fbil ) which is building a series of market benchmarks. i am hopeful that these will soon be used in innovative financial contracts. internationalization as a current account deficit country, india needs financing from abroad. ideally, we would like to attract risk capital, which is in short supply in this country. this means encouraging foreign direct investment, as well as equity investment. foreign investors can also help deepen debt and derivative markets as they contribute to price discovery and liquidity. not all domestic entities should issue claims held by foreign investors. ideally, of course, companies should be left to make decisions about what currency they borrow in, and how much they hedge, but given our weak bankruptcy system, there is moral hazard built into unhedged foreign borrowing – if the rupee appreciates, the promoter takes all the upside associated with paying the low dollar interest rate and the now - lower principal, if the rupee depreciates, the occasional unscrupulous promoter goes to his indian bankers and asks them to bail him out. this is why