India’s fintech sector introduces self-regulation

Category: Asia Fintech
Posted by Lea Hogg

India’s central bank, the Reserve Bank of India (RBI), has introduced a new self-regulatory framework for the country’s rapidly growing fintech sector. This move is seen as an attempt to increase industry standards without stifling innovation.

The fintech sector in India is currently overseen by several authorities, including the RBI, the Insurance Regulatory and Development Authority, and the Securities and Exchange Board of India. However, with the steep rise in the number of new fintech companies, there has been growing concern about the absence of comprehensive regulation.

In response to this, the RBI launched a framework in January to establish a self-regulatory organisation (SRO). The SRO is expected to set stronger governance standards and address other challenges. It will act as an intermediary, facilitating communication between its members and supervisors like the RBI.

The new framework is aimed at financial companies that are not covered by existing financial regulation. It addresses issues such as customer protection, cyber security, and grievance handling. The RBI has stated that a fintech company that adheres to the SRO and has formal recognition from the regulator will gain legitimacy and provide regulatory comfort.

The new SRO framework will provide clearer guidelines for fintechs to follow. It will also help implement more robust measures for consumer protection.

New approach to fintech regulation

Following recent demonetisation efforts in India, fintechs have played a crucial role in enabling a whole generation of unbanked masses to access banking services. This has led to exponential growth within the market and underscored the need for new types of regulations.

According to a 2021 report from PwC, out of the more than 1.3 billion people living in India, approximately 850 million reside in rural areas with limited or no access to financial services. The introduction of the United Payments Interface (UPI) and other significant developments within the digital payments industry have fostered innovative payment methods in India.

The UPI, launched in 2016, is a real-time payment system used on mobile devices to instantly transfer funds between two bank accounts. In January, the payment system recorded more than 12 billion transactions through its platform.

The potential for fintechs to operate in India is immense. He attributes this to the rise in digital payments and mobile penetration. One of the main challenges for this framework, he notes, is to devise a regulatory regime that allows innovation to thrive.

By 2025, the market size of India’s fintech industry is projected to reach $150 billion. The volume of digital payments is forecast to grow to approximately $100 trillion by 2030, according to data from Invest India.

While China, a neighbouring fintech hub, has recently adopted a stricter approach to regulating the market, India’s self-regulatory system takes a different path. It involves appointing representatives from the fintech sector to oversee the implementation of the new standards, thereby striking a balance between regulation and innovation.