RBI held more than 200 meetings with fintechs over last 6 months

"The need for a continued dialogue between finetchs and RBI came up in the fintechs meeting in New Delhi, and during the course of the discussion, RBI assured the finetchs that it would hold more structured regular meetings with the industry, as it does with banks and NBFCs," added this person.

The regulatory action of Paytm Payments Bank had led a dozen startups to pen a letter to the government and regulatory officials, urging them to engage in constructive dialogue with the fintech ecosystem. In this letter, the startup founders even asked the regulator to reconsider its action on the bank, raising concerns that such an action would not only impact customers but have far-reaching and detrimental consequences for the entire FinTech ecosystem.

This prompted the finance ministry to hold a meeting with fintechs in New Delhi recently to assure them that the government supported innovation in the financial sector and was there to address any concerns or issues they may have.

"The Union Finance Minister noted the rapid growth of the start-up and fintech sectors of India, especially in the last decade, and welcomed suggestions from the FinTech leaders to achieve greater Ease of Doing Business and Ease of Living for consumers. During the meeting, it was emphasised that innovative solutions by fintech companies are essential to the financial services sector while ensuring strict compliance with regulations," the finance ministry said in a press release after the meeting.

While the action on Paytm Payments Bank, and more recently on commercial card payments via Visa to unauthorised merchants by certain finetchs, have given rise to apprehensions among the industry that perhaps the regulator has taken a very strict stance on these players and this may affect the morale of the players in the ecosystem, the RBI has maintained that it remains supportive of the sector.

“Let me stress and let me emphatically state that the Reserve Bank is and will continue to encourage and support innovation and technology in the financial sector. Let there not be any doubt about the Reserve Bank’s commitment to promote fintech, to promote innovation, and to promote technology in the financial system,” RBI Governor Shaktikanta Das had said during the last policy press conference earlier this month while addressing issues around Paytm Payments Bank.

“Problem of a few startups can't be taken as the problem of the entire startup ecosystem. Many of them are doing alright. I don't want any sector to have any apprehension that they "can't do business in India". The government is very much with the startups. They will be given all assistance,” Finance Minister Nirmala Sitharaman also added at an Indian Express event recently.

Regulatory actions in the past, too, have been met with a mixed response from the fintech industry.

The regulator had first come up with Digital Lending Guidelines for the sector a couple of years ago to set guardrails for digital lending to protect borrowers, which brought legitimacy to a sector that was thus far lightly regulated. While this was welcomed by the industry, what followed after made life tougher for some fintechs.

For instance, in 2023, RBI capped the amount of a popular fintech product FLDG (first loss default guarantee) to 5% of the outstanding amount of a particular loan portfolio, which both provided relief to fintechs by allowing them to carry on with the offering, while also imposing a limit on the cover which would make the product less attractive to banks and therefore harder to sell.

Before that, RBI’s rule prohibiting non-bank institutions or fintech firms, including several buy-now-pay-later companies (BNPLs), from putting credit limits onto PPIs such as wallets and credit cards also came as a body blow to the likes of ZestMoney and Slice, which then had to pivot their business models to survive. ZestMoney eventually shut the shop after failed acquisition talks with PhonePe and other funding issues.

On the other hand, the Reserve Bank also instituted a whole host of measures to boost the fast-growing fintech ecosystem. It set up a FinTech Department to give dedicated attention to the sector, setting up of the Reserve Bank Innovation Hub (RBIH) as a wholly owned subsidiary of the RBI, to promote innovation across the financial sector, as well as set up a ‘Fintech Forum’ comprising representatives from the industry to promote advanced technologies, facilitate knowledge exchange, forge strategic partnerships, empower compliance and understanding and promote financial inclusion.

Among some of the more supportive policies RBI has recently come up with is a self-regulatory organisation (SRO) framework for fintechs to encourage self-regulation, the proposal to set up a fintech repository to enable the development of appropriate policy approaches, a Regulatory Sandbox (RS) framework wherein entities test new innovative products/services in a controlled regulatory environment with or without regulatory relaxation, and the introduction of Account Aggregators frameworks to manage consent and enable consumers to digitally access and share financial assets data in a secure, transparent, and efficient manner.

The increasing regulatory focus comes amid the fast-paced growth this sector has seen. India has over 10,200 fintech startups, the third-largest such cohort in the world. The mushrooming of instant digital loans, which brought convenience along with financial inclusion, also came with increasing instances of fraud, customer harassment and illegal mining of data. All this led the Reserve Bank to take steps to set more firm regulatory and supervisory guidelines for this industry.