Fintech regulations: Industry players pitch for simpler KYC norms, access to cheaper capital

The pitches stem from RBI deputy governor T Rabi Sankar’s recent remarks that the central bank will come out with regulations for the fintech sector soon.

Indian fintech companies are pitching for simpler know-your-customer norms for lending to small businesses and easier access to cheaper capital for priority sector lending after Reserve Bank of India deputy governor T Rabi Sankar said regulations would be framed soon for the sector.

Verification of customer data is the primary step for finance companies to provide services. Although there are digital verification services, the instant nature of fintech lending and other services has often led to discrepancies in operations.

“We would like to have KYC requirements for MSMEs (micro, small and medium enterprises) to be simplified in the fintech guidelines,” said Manish Lunia, co-founder of FlexiLoans.com.

Also read: RBI may bring fintech regulations soon: Dy governor Rabi Sankar

Fintech companies also want easier access to cheaper capital with their co-lending partnerships with banks for priority sector lending (PSL). Experts said after interest rates were hiked, capital for fintech companies has been an issue.

“There has been good growth in the number of partnerships between fintech and bank partnerships. Further, we would look at access to cheaper capital so that we could lend more to PSL,” said the chief executive officer of a fintech company, who did not wish to be identified.

Specific regulations

Lunia said access to cheaper capital for lending to priority sectors such as MSMEs, microfinance, self-help groups, and agriculture should be provided for in the proposed regulations.

Sankar, while addressing Moneycontrol’s Startup Conclave on July 7, said the central bank is working on regulations for the fintech sector. Currently, only some guidelines have been issued for the functioning of fintech companies.

“We are working on fintech regulations that would be specific to these entities and ecosystems,” Sankar said.

Also read: Change is happening in banks with innovation from startups and fintech: IDFC First Bank CEO V Vaidyanathan

Regulations are needed to govern a sector that is poised to triple in size in the four years ending 2025.

India is among the fastest-growing fintech markets in the world, according to a July 2023 report by Invest India, the national investment promotion and facilitation agency.

“The Indian fintech industry’s market size was at $50 billion in 2021 and it is estimated to be around $150 billion by 2025,” Invest India said in the report.

"Now fintechs are competing with banks. In the future we may see fintechs become like banks," said Rajnish Kumar, chairman of fintech company BharatPe and former chairman of the State Bank of India.

The regulator had earlier introduced guidelines for lending and other operations by fintech entities, which are new-age companies that use technology to offer lending and payment services.

On June 8, the regulator approved the first loss default guarantee (FLDG) system for fintech companies, by which they would partially cover losses if a borrower defaults. The RBI fixed the FLDG at 5 percent for loan defaults.

In August 2022, the RBI released norms to regulate digital lending to crack down on the growing number of frauds and unlawful activities.

Also read: Behind RBI's move to cap FLDG at 5% and why it’s not good news for fintechs

“All loan disbursals and repayments have to be executed only between the bank accounts of the borrower and the regulated entity without any passthrough or pool account of the lending service provider (LSP) or any third party,” the regulator said.

Data privacy

Ram Rastogi, chairman of the Fintech Association for Consumer Empowerment, said the Reserve Bank Innovation Hub (RBIH) is working on regulations.

Also read: Fintechs rewriting the rule book, banks will compete and co-exist, says Rajnish Kumar

“RBIH will coordinate efforts for exchange of ideas and development of prototypes related to financial innovations for creating an ecosystem that would focus on promoting access to financial services and products and would further financial inclusion,” said Rastogi.

Experts said the regulator may also bring in regulations on data privacy and outsourcing of services in the fintech sector.

“Data privacy and use of outsourcing services seem to be the most pertinent regulatory areas that the RBI may focus on. Lack of clear regulatory guidance is one of the problematic areas. Bringing clarity to this sector via a defined set of rules will pave well for the long-term future of the industry,” said Lunia.

Rastogi said: “By presenting a unified front and sharing collective insights, these companies can engage with policymakers and regulatory authorities to shape a conducive environment for fintech development.”