New Fintech Regulatory Body: What Does it Mean for India?

The Indian fintech industry has grown at a remarkable pace in recent years. It was the second most-funded startup sector in the South Asian country for 2022 per Invest India insights, with bourgeoning fintechs raising US$5.65bn in funding that year. 

The country has seen fintech market leaders emerge throughout the last decade, with the likes of Razorpay, founded in 2014, having amassed over 300 million customers since its inception.

And while investment in firms situated in major cities like Delhi and Mumbai has been the historical “go-to” for international venture capitalists, the rise of Bangalore (Bengaluru) as the “Silicon Valley of India” now features the biggest concentration of high-growth startups across the country. 

Rapid fintech growth cause for regulatory change

Such is the break-neck speed of fintech growth that the Reserve Bank of India (RBI) has now called for the formation of a self-regulatory organisation (SRO), releasing a draft framework in a move to sure up statutory and regulatory compliance for local fintech firms. 

Indeed, fintechs operating in established Western markets are no strangers to toeing the line between compliance and innovation. 

There have, in recent times, been high-profile cases of fintech non-compliance, such as the US$18m fine the US Federal Trade Commission (FTC) issued to cash-advance fintech Brigit in November 2023 and the £11m (US$13.8m) fine imposed on credit reporter Equifax by the UK’s Financial Conduct Authority (FCA). 

Regulations, particularly in the fintech space, tend to play catch up with the speed of innovation. Where and when they do, fintechs and other financial institutions must take particular diligence, a reality which, in some cases, may slow down the pace of innovation. 

So, what would an SRO mean for the Indian fintech industry? Let’s first look at the details laid out by the RBI. 

RBI: A new fintech SRO

In announcing the formation of a fintech SRO, the RBI has heeded the call of its Governor Shaktikanta Das, who urged for an SRO formation back in September 2023.

Per its formation, the SRO will consult directly with the RBI when developing and updating the taxonomy for fintechs, when carrying out tasks assigned to it by the RBI and to supply information as directed by India’s central bank. 

The RBI will also reserve the right to inspect SRO books and/or arrange to have them audited. 

The first port of call for the SRO’s board will be to put a framework in place for the ongoing monitoring of the “fit and proper” status of its directors. 

Amendments to the draft proposal are expected to be relayed to the RBI by the end of February 2024, after which a final framework will be announced. 

What will an RSO mean for the Indian fintech industry?

Of course, many fintechs across global markets have fallen foul of regulations as previously mentioned, and so too may several Indian fintechs once the RSO comes into effect. 

So while this could hamper innovation for some, slowing the pace and speed in which new products come to market, an RSO would simultaneously help to establish a more stable, trustworthy fintech market. 

This, ultimately, is also a plus for venture capitalists and should make the Indian fintech market a more enticing investment prospect. 

In a way, it is a mark of the Indian fintech industry’s resounding growth success that an RSO has been warranted at all, a move that bodes well for future investment in the country’s high-scale fintech startup industry. 

An RBI statement on the RSO formation reads: "Achieving a healthy balance between facilitating innovation by the industry on the one hand, and meeting regulatory priorities in a manner that protects consumers and contains risk, on the other, is crucial to optimising the contribution of the fintech sector."

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