Financial technology companies therefore obtained an audience with the Minister of Finance. RBI has launched monthly meetings to increase engagement. It also issued a license to a Self-Regulatory Organization for Financial Technology (SRO-FT).
So, is the narrative that the fintech sector faces regulatory hurdles really true?
In 2024, out of nearly 340 cases of coercive action taken by the RBI, 75% concerned cooperative banks. Eighteen private banks and seven public banks also faced financial sanctions. In comparison, fewer than 10 fintech entities were penalized.
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These figures do not seem to support the idea that the fintech sector is subject to increased regulatory scrutiny.
Aggregate data often overshadows nuance. We therefore analyze a few cases to understand whether they can be qualified as “regulatory overrun”.
The aggressive interpretation of the First Default Loss Guarantee (FLDG) regulations has led the RBI to institute prescriptive guidelines. A fintech company with an innovative product idea or the ability to identify potential borrowers using alternative data would want to partner with a non-banking financial company (NBFC) or bank to lend.
At the same time, the lender wants to reduce the risk of non-repayment by this new segment of borrowers. By providing an FLDG, the fintech company agrees to bear these losses up to an agreed percentage.
In the absence of any regulatory restrictions, these tie-ups have often been concluded at high FLDG rates, sometimes even as high as 100%.
In effect, the fintech partner operated as an unlicensed lender. The resulting regulatory measure, capping the FLDG at 5%, was highly debated due to its impact on innovative lending models.
In the case of Peer-to-Peer (P2P) lending platforms, regulations have been violated. These platforms are authorized to play the role of matchmaker and facilitate loan/borrowing transactions between individuals.
P2P platforms cannot attract lenders by offering a cap on possible losses due to non-repayment of loans.
Mixing of funds in disbursement and collection streams is not permitted. In practice, a few P2P platforms have started to behave like banks by offering lenders guaranteed minimum returns and liquidity options. This led to enforcement action by RBI and more prescriptive guidelines.
On the other hand, the conclusions of the notification asking Navi FinServe to refrain from disbursing new loans in October can be described as ambiguous. One of the main reasons for this regulatory tightening appears to be the high interest rates charged. In response, Navi reduced its interest rates on personal loans, leading to its ban being lifted in less than 45 days.
To protect its customers, RBI must guard against “interest rate scams” by lenders. But the answer to the question of what constitutes a “high” rate and whether a cap should be imposed is unclear.
The aggregate data and these examples indicate increased media interest rather than regulatory siege. In this context, it is important to understand that the financial sector is different from other sectors. The regulator is responsible for developing the sector while ensuring the overall stability of the financial system and the protection of customers.
Encouraging innovation is important for the evolution of the sector. The list of innovations facilitated by RBI and the institutions it helped found (NPCI, RBIH) is impressive.
Consider 24×7 Fund Transfers (IMPS/NEFT/RTGS), Unified Payments Interface, Rupay, Aadhaar Enabled Payment System, Bharat Bill Payment System, account aggregator, United Lending Interface (ULI), etc.
Fintech startups have exploited these innovations, the assimilation of which without disruption is equally important for the stability of the financial system. Currently, there is still some way to go to bridge the gap between regulatory expectations and industry standards.
A survey carried out in November by Grant Thornton estimates that there is still much to be done in this area. The regulator reiterated that governance, risk management and customer grievance resolution are key themes for the sector to focus on. However, fintech lenders do not view these as major risks to their business operations.
These results appear to support the views expressed by T. Rabi Shankar, Deputy Governor of the RBI, in his speech on “Fintech and Regulation”. He spoke of “an unexpected regulatory challenge that could be described as compliance aversion.
Financial entities traditionally subject to regulation understand that regulation serves the broader goal of systemic stability and development.
Entities outside the financial space are still learning to adapt to a regulated environment. Therefore, their first reaction to the regulation is objection. »
Self-regulation is one way to address this alleged regulatory misalignment. The SRO-FT license provides an RBI-recognized platform for reaching consensus on controversial issues. It should be used to curb attempts to profit from regulatory arbitrage.
Transparency can be increased by prominently displaying interest rates and fees on fintech apps and websites.
The OAR-FT could take the lead and publish its members’ interest rates on its website. Collaboration with the regulator to identify and expose dishonest fintech players and illegal applications should be strengthened.
Fintech has an important role to play in making financial services in India future-proof and these steps will help it deliver on its promise faster.
The author is an economist and researcher.