Following the RBI’s action, a section of the industry expressed the sentiment that the regulatory environment, instead of fostering innovation, could hamper the progress of fintech companies.
It is said that technology-driven companies have always been ahead of regulations and regulations are not catching up. The objective of setting up a payments bank was to serve an unserved and underserved Indian population with minimal KYC and Customer knowledge accounts with a credit limit of Rs 2 lakh only.
“The growing fintech sector has come under increased regulatory scrutiny over the years, as has other emerging sectors in the digital economy. The government has been supportive of the startup ecosystem… it is taking a balanced approach to ensure that the regulatory environment is conducive to innovation,” said Bipin Preet Singh, CEO, MobiKwik.
With the Digital Public Infrastructure (DPI) and safeguards to establish increased compliance in the sector, such as the call to establish a fintech SRO, it can be said that the Indian regulatory environment has been very favourable for the sector, he added.
The government needs to revisit the regulatory policies and normative framework, so that Indian fintech companies are more transparent to both the government and consumers, said Aankush Ahuja, Founder and CEO, Fractional Ownership Investment Platform (FOIP). With consumers’ disposable income increasing, they are trusting fintech companies more for their savings and investments, said Ahuja, who runs an innovative fractional ownership platform that helps raise funds for value deals in real estate and financial services. Only consistent government policies and a regulatory framework will help bring more transparency and consumer security in the fintech ecosystem, he added.
Experts also said that the current regulatory environment calls for caution in managing systemic risk in the financial system and prescribes differentiated regulation for the sector to thrive.
According to Vijay Mani, Partner, Deloitte India (Banking & Capital Markets), the current regulatory environment calls for caution in systemic risk management, especially with regard to issues such as KYC/AML compliance, strong and independent governance of regulated entities, fraud risks and cybersecurity risks.
This is essential to maintain the credibility of the financial system and safeguard the interests of the end consumer, Mani said.
“That said, it may be wise to further use mechanisms such as sandboxes for early and open engagement between regulators and fintechs, and consequently, broader and more significant information sharing on the complexities of compliance and risk management. This can provide better visibility to investors on the risks to their capital,” he added.
Avimukt Dar, Founding Partner, Induslaw, believes that there is a need for tailored regulation and not a strict approach when it comes to the tech-driven sector and that the compliance burden should not be enough to stifle the sector. The regulator should support these start-ups and give them an opportunity to achieve the Digital India mission.
Regulators recognize that the consumer benefits of disruptive innovation by startups may in some cases outweigh the compliance risks and therefore every effort is made to balance the risks with the potential benefits, Dar said, adding that this is particularly the case when the startups or the niche they are in have not yet reached scale.
“I believe a tailored approach to fintech regulation is needed. Large regulated entities like banks and mutual funds benefit from the innovation and execution capabilities of agile startups and as such, the ecosystem, like any other, has the potential to be symbiotic,” Dar said.
Given that the fintech sector is primarily about the movement of money and financial data, a regulatory approach that allows consumers to play at a level that does not risk their savings and preserves the integrity of their personal data could provide a useful balance, he said.
At the same time, encouraging light licensing of startups will help strengthen compliance and governance standards in the fintech sector, he added.
Shilpa Mankar Ahluwalia, Partner at Shardul Amarchand Mangaldas & Co, shares Ecohong’s view that regulations need to strike a balance between creating ecosystems that protect consumers while enabling innovation.
The growth and adoption of fintech products in India has been exponential, especially in the digital payments and lending sectors, she said, adding that once markets reach a certain scale and size, regulation is inevitable and essential for growth.
Regulatory changes made with little notice create market disruptions and also increase the perception of regulatory risk among innovation and investment communities, she added.