The Indian fintech sector has evolved into one of the largest ecosystems globally, introducing a range of innovations that have enhanced the accessibility of payments and financial services for millions. However, these advancements have not come without significant challenges. According to an annual report by the Reserve Bank of India (RBI), incidents of internet and card-based banking fraud soared by four times in FY24. The RBI’s data show an alarming 29,082 cases of credit/debit card and internet-based fraud in the financial year 2023-2024, marking a staggering increase of 334% from the previous fiscal year’s tally of 6,699 incidents. It is evident that immediate action is required to combat these issues.
Highlights
Regulatory Crackdowns and Their Impact
In January, Paytm Payments Bank faced severe regulatory consequences when it was prohibited from onboarding new customers and was compelled to cease all banking services due to violations of Know Your Customer (KYC) regulations. The repercussions for Paytm were significant, as its stock fell sharply, reaching a low of nearly Rs 317 per share in the subsequent months.
A fintech investor, wishing to remain anonymous, commented, “This situation created a strong incentive for fintech companies to ensure compliance within their operations. It served as a reminder that adhering to regulations is essential, regardless of the company’s size or customer base.” The RBI’s directive also necessitated that Paytm Payments Bank stop onboarding new UPI customers and freeze crucial payment services, which severely threatened its market position. Fortunately, in October, the company obtained approval from the National Payments Corporation of India to recommence UPI registrations, restoring a vital growth avenue.
Since then, Paytm has fully recuperated from the regulatory challenges of January. By December 27, the company’s shares were trading at over Rs 990 per share, successfully reversing the losses incurred from the RBI’s regulatory actions earlier in the year.
Peer-to-Peer Lending Under Scrutiny
Paytm was not the only firm subjected to regulatory scrutiny. The RBI revised its framework for non-banking financial companies facilitating peer-to-peer lending (NBFC-P2P), aiming to mitigate malpractice and improve transparency within the industry.
The updated regulations prohibit NBFC-P2Ps from assuming any credit risk, either directly or indirectly. Previously, platforms were not permitted to offer credit enhancements or guarantees, but the new guidelines go further to ensure that lenders assume the entire risk of principal and interest losses.
Startups such as LenDenClub and IndiaP2P swiftly adjusted to these new regulations by implementing updated features and processes. Conversely, other companies have faced challenges in compliance. Both Cred and BharatPe, for instance, have paused all new P2P investments.
Investors have also been affected by these changes. MobiKwik Xtra, a peer-to-peer lending service offered by NBFC-P2P Lendbox, had previously assured instant withdrawals. However, following the RBI’s crackdown, Lendbox suspended all secondary sales, compelling some investors to wait until 2026 before they could access their funds.
Bhavin Patel, Founder & CEO of LenDenClub, stated, “This year has been transformative for the P2P lending landscape. These regulatory reforms are essential; although they may seem challenging in the short term, they lay the groundwork for long-term innovation and growth. Overall, these changes benefit platforms, lenders, and borrowers. Nevertheless, certain aspects are excessively restrictive and hinder innovation,” he added.
Lending Practices Under Fire
In October, the RBI acted against DMI Finance and Navi Finserv due to concerns over their pricing strategies. Reports indicate that Navi’s interest rates, which reached as high as 35%, were a significant issue.
Several digital lenders criticized the RBI’s actions, questioning why NBFCs were under scrutiny while credit card companies with similar or higher interest rates were largely unaffected. They argued that existing RBI mandates require full disclosure of interest rates and fees to customers.
Earlier this month, the RBI lifted restrictions on Navi Finserv, allowing the NBFC to resume loan sanctioning and disbursal activities.
Akshay Mehrotra, Co-founder & CEO of Fibe, a fintech enterprise, remarked, “In this changing regulatory landscape, it is crucial for fintech companies to foster innovation while implementing robust risk management strategies and adhering to regulatory guidelines. This approach is vital for building trust in digital financial solutions among customers.”
Self-Governance Initiatives
While some critics assert that the RBI’s approach is overly stringent, it has also paved the way for increased self-governance. In May 2024, the RBI launched a framework aimed at establishing self-regulatory organisations within the fintech landscape. This initiative seeks to harmonise innovation with protections for customer interests, data privacy, and cybersecurity while encouraging self-governance among fintech entities.
Self-regulatory organisations are intended to set industry standards, ensure legal compliance, and act as impartial entities for dispute resolution within the fintech community. By cultivating a culture of accountability and collaboration, this framework encourages fintech firms to voluntarily adhere to ethical and operational best practices.
On August 28, the RBI announced the recognition of the Fintech Association for Consumer Empowerment as the first self-regulatory organisation in the Indian fintech space.
Mehrotra noted, “The growth of the fintech sector is supported by various regulatory initiatives, with the self-regulatory organisation playing a crucial role in shaping the landscape. It will foster collaboration between regulators and industry players and enhance self-regulation and compliance within the sector. Furthermore, it will contribute to establishing a more transparent ecosystem, safeguarding consumer interests. As we progress, the three pillars of self-regulation, risk management, and customer education will remain essential in constructing a more inclusive, resilient, and innovative digital financial framework.”
