Is the fintech sector in India under a regulatory siege?

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Subscribe to enjoy similar stories. The regulatory developments and the actions of the Reserve Bank of India (RBI) on fintech entities in 2024 received widespread coverage. The unease felt by the sector was expressed in various forums.

Consequently, fintech companies got an audience with the finance minister. RBI initiated monthly meetings to increase engagement. It also issued a licence for a self-regulatory organization for fintech (SRO-FT).

So, is the narrative of the fintech sector facing regulatory headwinds really true? In 2024, out of nearly 340 cases of enforcement action by RBI, 75% pertained to cooperative banks. Eighteen private banks and seven state-run banks also faced monetary penalties. In comparison, less than 10 fintech entities were penalized.

These numbers do not seem to support the view that the fintech sector is under increased regulatory scrutiny. Aggregate data often overshadows nuances. So, we analyze a few instances to understand if they qualify as ‘regulatory overreach’.

The aggressive interpretation of regulations on First Loss Default Guarantee (FLDG) resulted in RBI instituting prescriptive guidelines. A fintech firm with an innovative product idea or capability to identify potential borrowers using alternate data would want to tie up with a non-banking financial company (NBFC) or bank to lend. At the same time, the lender would like to reduce the risk of non-repayment by this new segment of borrowers.

By providing an FLDG, the fintech company agrees to bear these losses up to an agreed percentage. In the absence of any regulatory restriction, such tie-ups were often concluded at high FLDG rates, sometimes even up to 100%. In effect, the fintech partner was operating like a lender without a