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Experts Suggest Regulatory Reassessment To Boost Fintech Sector And Ease Compliance Burden

Following the RBI's action, some in the industry expressed concern that the regulatory environment, rather than fostering innovation, could hinder the progress of fintech companies.

Experts Suggest Regulatory Reassessment To Boost Fintech Sector And Ease Compliance Burden

Press Trust Of India

POSTED ON February 26, 2024 3:26 PM

With fintech sector gaining size and scale, there is a need to relook at the regulatory policies and guidelines to give further impetus to financial inclusion drive and penetration of financial products to the bottom of the pyramid, experts said. 

The fintech space has revolutionalised the financial sector in the country. It has also helped to a great extent in formalising the Indian economy, but the recent incident of the Reserve Bank's action on Paytm Payments Bank Ltd (PPBL) left a section of the industry perplexed. 

Post the RBI's action, a section of the industry expressed sentiment that the regulatory environment, instead of nurturing innovation, could impede the progress of fintech companies. 

It is being said that technology-led companies have always been ahead of regulations and regulations do catching up. The purpose of creating a payments bank was to serve an unserved and under-served population of India with min-KYC and full KYC accounts with a credit limit of Rs 2 lakh only. 

"The rapidly growing fintech industry has faced more regulatory scrutiny over the years as with other emerging new-age digital sectors of the economy. As the government has been supportive of the startup ecosystem...it is taking a balanced approach to ensure that the regulatory environment would foster innovation," MobiKwik, CEO Bipin Preet Singh said. 

With Digital Public Infrastructure (DPI) and guardrails 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 highly supportive of the sector, he added. 

The government needs to relook at the regulatory policies and guideline framework, so that Indian fintech companies are more transparent to both government and consumers, Aankush Ahuja, Founder and CEO, of FOIP (Fractional Ownership Investment Platform), said. 

With rising disposable income of consumers, they are putting more trust into fintech companies for their savings and investments, Ahuja, who runs an innovative fractional ownership platform that helps to raise funds for value deals in real estate and financial services, said. 

Only cohesive government policies and regulatory framework will help in bringing more transparency and security for consumers in the fintech eco-system, he added. 

Experts also said that the present regulatory environment urges caution intending to manage systemic risk in the financial system and prescribe differential regulation for the sector to grow. 

According to Deloitte India partner (banking and capital markets) Vijay Mani, the current regulatory environment urges caution with a view to managing systemic risk, particularly with regard to matters such as KYC/ AML compliance, robust and independent governance of regulated entities, fraud risks, and cyber security risks. 

This is essential to maintain the credibility of the financial system and safeguard the interests of the end consumer, Mani said. 

"Having said that there may be a case for greater use of mechanisms such as sandboxes for early and open engagement between regulators and fintechs, and accordingly, greater and wider information sharing on compliance and risk management complexities. This can provide better visibility to investors on the risks to their capital," he added. 

Induslaw founding partner Avimukt Dar is of the opinion that there is need for tailor-made regulations and not a straightjacket approach as far as technology-led sector is concerned, and compliance burden should not be enough to stiffle the sector. The regulator should handhold these young companies and give them chances to achieve the digital India mission. 

The regulators do recognise that the consumer benefit of disruptive innovation by start-ups in some cases can outweigh the compliance risks and as such every effort is made to balance the risks with the potential benefits, Dar said, adding, this is especially the case when the startups or the niche they are in are yet to scale. 

"I think a tailor-made approach to fintech regulation is required. Large regulated entities such as banks and mutual funds benefit from the innovation and execution abilities of nimble startups and as such the ecosystem, like any other, has the potential to be symbiotic," Dar said. 

Since the fintech sector is primarily about the movement of money and financial data, a regulatory approach that allows consumers to play at a ticket size that doesn't risk their life savings and maintains the integrity of their personal data could provide a useful balance, he said. 

At the same time encouraging light touch licensing of start-ups will help in building out compliance and governance standards in the fintech sector, he added. 

Ecohong similar view, Shilpa Mankar Ahluwalia, partner, Shardul Amarchand Mangaldas & Co, said, regulations need to find a balance between creating ecosystems that protect consumers but still allow for innovation. 

The growth and adoption of fintech products in India has been exponential, particularly in the payments and digital lending sectors, she said, adding, that once markets reach a certain scale and size, regulation is inevitable and critical to growth. 

Regulatory changes brought about with little notice do create disruption in the market and also increase the perception of regulatory risk among the innovator and investor communities, she added. 

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