India’s fintech entrepreneurs must accept they are not above the law of the land

   2024-02-06 17:02

On Monday, soon after the regulatory action against Paytm Payments Bank, a few entrepreneurs of new-age companies wrote to the finance minister and to the Reserve Bank of India governor making out a case for reviewing the move. 

These entrepreneurs wanted the government and the central bank to reassess the proportionality of restrictions given the potential impact on not just Paytm Payments Bank but also on the fintech ecosystem and the broader economy. 

There is hardly any parallel for this, in terms of fellow promoters jumping in quickly to back an entity on which RBI has imposed restrictions, including on onboarding new customers. Though it may seem unusual in India’s financial sector where regulatory fiats are rarely contested it should not come as a surprise. 

The Indian fintech industry is the third-largest globally, taking into account the number of firms. By 2030, the fintech industry is projected to top revenues of $200 billion. And with the government showcasing the success of this industry, many entrepreneurs and young innovators like their counterparts in the IT industry earlier are far more vocal.  

Yet on the same day, a minister in the Narendra Modi government, Rajeev Chandrasekhar, who has been an entrepreneur himself, said that fintech firms are not above regulation. 

As more details emerge, it may well seem that the group of entrepreneurs and promoters who protested RBI’s action may be shooting from the hip. Especially if the timeline of the violations, regulatory warnings and actions taken against the payments bank are taken into account starting soon after it was licensed in 2016. 

And considering that of just half a dozen such purely payments banks, Paytm Payments Bank is the only one as of now in the line of  regulatory fire. Several reports indicate that RBI’s action was not just because of KYC violations but also related to segregation of accounts within the group, which has other businesses, and possibly skirting of other rules too. Only RBI can provide greater clarity on this. 

The proportionality of the central bank’s action is what is being debated now. It could be that the sledge hammer blow from RBI may have been guided by the aim of protecting the interests of the payments bank’s depositors. And perhaps against the backdrop of the collapse of a few banks, to pre-empt such a prospect. 

Besides, the ripple effects would be much smaller in the case of a payments bank. It should be well possible to migrate much of the merchants who transact with the payments bank to other banks, as also the FASTtag business, with a bit of disruption. Some of the fears regarding this appear overblown.

What should worry both RBI and the government is the apparent discomfort of some of the licensed firms in the fintech industry with conforming to regulatory norms.  Light touch regulation is what they may be advocating for an industry which thrives on innovation. 

But what they may not be mindful of is the fact that when they are granted a licence to accept deposits, it is a privilege as public funds or money is involved. And in turn trust and faith, and in the broader sense for full fledged banks, financial stability.

RBI governor Shaktikanta Das said last year that the central bank aims to play a dual role of acting as a promoter of innovation as well as being the regulator.

India’s fintech industry has certainly contributed significantly over the last few years to broadening access to financial services at a faster pace, lower costs and efficiently. Importantly, it is fintech firms that have pushed India’s large banks in this area. 

That’s why it is important for RBI, the government and the industry to engage more especially on regulation and the pathway for evolution of oversight of the industry.    

Some of the challenges that the industry is facing could be owing to the fact that it is not ‘patient capital’ that powers many firms in the fintech business. Private equity or capital that funds many of these firms evaluate metrics such as customer numbers, volumes and revenue besides valuations, and in relatively shorter time-frames. 

That, and in some cases the pressure to list publicly is also bound to put pressure on many entrepreneurs. Building an enduring business model especially in banking isn’t easy while retaining market integrity. Valuation, market capitalisation and other gains follow. 

With the issue of proportionality of regulatory actions now having been raised, it is a good time for policy makers to think of and work on orderly resolutions in the Indian financial sector.

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