Start-ups must balance growth and compliance with regulations: DFS Secy Joshi

Joshi’s comments come at a time when one of India’s premier start-ups in the financial sector space, Paytm, has run into trouble with the RBI.

Business growth and compliance with norms must go hand in hand for start-ups, Financial Services Secretary Vivek Joshi has said.

"The start-up ecosystem has to understand that as they grow, they will have to keep up with regulations and compliance," Joshi told Moneycontrol in an interview on February 7.

Also Read: DFS Secy says RBI action on Paytm's bank in interest of consumers, economy

"For example, if you have a small home-run, import-export business, you don't need a licence. But you can't say that you won't take a licence from DGFT (Directorate General of Foreign Trade) or not pay a duty after growing beyond a certain size," he added.

Joshi's comments come at a time when one of India's premier start-ups in the financial sector space, Paytm, has run into trouble with its regulator, the Reserve Bank of India (RBI). On January 31, the Indian central bank directed Paytm Payments Bank to stop accepting fresh deposits and making credit transactions after February 29. The payments banks has also been barred from accepting top-ups in any customer accounts, including prepaid instruments, wallets, FASTags and NCMC cards.

The RBI has said it is taking action against the bank after the Comprehensive System Audit and compliance validation report of the external auditors revealed "persistent non-compliance and continued material supervisory concerns in the bank, warranting further supervisory action".

"Fintechs are very good in technology and innovations. They are young entrepreneurs, they have an idea, and get backing from angel investors," Joshi told Moneycontrol.

"But they are small (to begin with). As they grow, they have to start interacting with the government and regulators. Suppose I am an MFI (microfinance institution) and I start an NGO and give loans to people in villages. I don't need a licence for that. But as soon as I become Rs 100 crore in terms of size, then I will have to go to the RBI. Then I can't say 'I did great work until now and will continue to do so'. I'll have to follow the law of the land," the secretary added.

Also Read: Tough times ahead for Paytm's bank as RBI gives no concessions

Players in the fintech space have been made to increasingly follow regulations in both letter and spirit by the RBI. For instance, in August 2022, the central bank barred third-party accounts including prepaid payment instruments (PPIs) such as prepaid cards and wallets from the flow of lending and said that any loan remittances and repayments should be made only between the customer's and lender's bank accounts.

More recently, in September 2023, the risk weights on unsecured retail loans were increased to clamp down on the rapid credit growth in this segment, which experts say has been aided by the ease and convenience provided by new-age digital lending platforms. As a result of the higher risk weights, digital lending through fintech platforms slowed down as they required greater amounts of capital, affecting the entities in this space that have grown quickly on the back of commission revenue.