RBI asks Banks to review contracts with fintechs

According to highly placed sources, the purpose of this report to pinpoint certain critical aspects of the contracts, such as which entity has the ultimate ownership of the customer, whether the full responsibility of assessing the customer credit worthiness lies with the bank, fintech, or split between the two, and who is ultimately bearing the credit risk of the contract. 

In short, the objective is to ascertain whether the bank has full control of the underwriting process before onboarding the customer and would bear the credit risk in full, in case of defaults.
 
“Though not like past NPA level, but the book sourced though fintechs are still not performing exactly like how the in-house sourced book of the bank is performing in terms of credit quality. Hence the RBI wanted to get a hold of who has ultimate underwriting and risk management responsibilities on portfolio sourced though fintechs,” said a highly placed source aware of the matter. Sourcing loans through fintechs is particularly popular for payday loans, personal loans and credit card. Of the three, credit cards, in particular, are gaining traction, especially among smaller banks. 

Further with some of the fintechs operating in the sourcing side are yet to establish their credentials and don’t have an operational history or proven track record yet to justify their domain expertise. Sources say that this is another factor which the regulator isn’t very comfortable with.