The RBI governor, Shaktikanta Das, emphasizes the central bank’s commitment to fostering innovation and regulating the financial sector.
Following the recent regulatory measures taken against Paytm Payments Bank, a number of entrepreneurs from modern companies quickly penned letters to the finance minister and the Reserve Bank of India governor, emphasizing the need to review the situation.
Their primary concern lay in the potential impact of the restrictions not only on Paytm Payments Bank, but also on the wider fintech ecosystem and the overall economy, prompting them to seek a reassessment of the proportionality of the regulatory measures.
This concerted support for an entity facing restrictions from the RBI is a rare occurrence in India’s financial sector, given the usual lack of challenge to regulatory decisions. However, this response is not entirely unexpected, considering the increasing prominence of the third-largest global fintech industry, projected to exceed $200 billion in revenues by 2030.
With the government championing this industry’s success, entrepreneurs and innovators are finding their voices, much like their counterparts in the IT industry in earlier years.
On the same day, Minister Rajeev Chandrasekhar, himself an entrepreneur, emphasized that fintech firms are not exempt from regulation, highlighting the need for oversight in this sector. As more details emerge, it becomes evident that the group of entrepreneurs and promoters contesting RBI’s action may not have all the relevant information.
Allegations of violations, regulatory warnings, and actions taken against the payments bank since its licensing in 2016 have given rise to concerns about the timing and nature of these issues, including reported KYC violations and possible breaches of other rules.
The specificity behind RBI’s decision awaits further clarification, with indications that the central bank’s action was not solely due to KYC violations, but also related to account segregation within the group and potential infractions of other regulations.
The proportionality of the regulatory action is now under scrutiny, with considerations about whether the RBI’s measures are justifiable in safeguarding the interests of the payments bank’s depositors and preventing potential banking crises.
Debate thus ensues regarding the nature and timing of the regulatory intervention, with a demand for greater transparency from the RBI about the rationale behind its actions. While the regulatory environment is paramount for maintaining financial stability, it is crucial to ensure that the measures taken are proportional and in the best interest of all stakeholders involved.
Moving forward, clarity and a well-informed assessment of the situation will be essential in addressing the concerns raised by the entrepreneurs and in preserving the integrity of the fintech industry.
The impact of a payments bank experiencing disruptions would likely be less severe compared to a full-fledged bank. It is feasible to shift many of the merchants who deal with the payments bank to other banks, along with the FASTtag business, although there may be some disruptions. Thus, some concerns about this appear to be exaggerated.
Both the RBI and the government should be concerned about the uneasiness of some licensed firms in the fintech industry when it comes to adhering to regulatory standards. These firms may advocate for a light-touch regulation, given the industry’s emphasis on innovation.
However, they may overlook the fact that holding a deposit-accepting license is a privilege involving public funds. This privilege entails trust, faith, and, for full-fledged banks, financial stability.
Last year, RBI Governor Shaktikanta Das mentioned that the central bank aims to simultaneously serve as a promoter of innovation and as the regulator. India’s fintech industry has significantly contributed to expanding access to financial services swiftly and cost-effectively in recent years. Importantly, fintech firms have compelled India’s major banks to enhance their services in this domain.
Therefore, it is crucial for the RBI, the government, and the industry to enhance engagement, particularly concerning regulation and the progression of industry oversight.
The challenges confronting the industry may stem from the fact that many firms in the fintech business are not backed by long-term investment capital. Private equity or funding for these firms often assess metrics such as customer numbers, volumes, revenues, valuations, and relatively short-term goals.
Additionally, the pressure to go public in some instances could intensify the burden on entrepreneurs. Establishing a sustainable business model in banking while upholding market integrity is no easy feat, despite subsequent benefits such as valuation, market capitalization, and other gains.
Given the raised issue of the appropriateness of regulatory actions, it is an opportune time for policymakers to contemplate and take steps to ensure orderly resolutions in the Indian financial sector.
