Investing in the growth of a country’s fintech sector should also entail investing in appropriate regulations across entities in the sector. India’s fintech sector recently saw a 68% boost in funding, making the country the fourth highest-funded fintech startup ecosystem globally. Overall, India is the third largest startup ecosystem globally — with nearly 100,000 startups in the country — behind the US and China.
This significant growth trajectory means that many Indian individuals and households rely increasingly on fintech services and solutions, digitally handling their finances and other money matters. To keep processes transparent and deter any malicious acts, fintech regulations are a necessity and should be prioritized. Below, we’ll look at some key fintech regulations in India and how they impact customers and fintech companies:
Ombudsman for digital transactions
Digital transactions mean any seamless payment transaction affected without the need for cash. This extends to any payment transaction accomplished through electronic means without physical cash involved. To prevent scams and loss of finances, digital transactions should be regulated without breaching customer privacy.
In a previous post, we discussed the Ombudsman Scheme for digital transactions as established by the Reserve Bank of India (RBI). This scheme focuses on establishing a mechanism for resolving complaints of customers regarding digital transactions. This aims to reduce fraud and ensure that the terms of digital payments remain transparent among customers.
Foreign exchange transaction limits
One of the effects of India’s fintech growth is the increased access to foreign exchange markets. People can use online trading platforms to trade forex from the global currency market — accessing over 100 currency pairs without delays. In fact, many people turn to forex trading to make additional income and grow their wealth. At the same time, people may also need to exchange foreign currencies for traveling abroad or transferring money overseas.
As foreign exchange has become more common, the RBI established foreign exchange regulations such as limits to foreign currency transaction amounts (Rs 50,000) and limits to foreign currencies being purchased (up to USD 2,50,000 or its equivalent in any other currency). This is done to maintain stability in exchange rates and hopefully attract further foreign investment as a result.
The rise of RegTech
Another key aspect of fintech regulations in India is the rise of regulatory tech (or RegTech). Regulatory bodies often announce and implement new frameworks and regulations to undertake proper due diligence and ensure ethical and fair business conduct. New technologies, like RegTech, are put in place to help fintech companies keep up with and maintain compliance.
Most regulatory technology solutions in India today focus on know-your-customer (KYC) and anti-money laundering (AML) compliance. In case of red flags or transaction errors, KYC and AML compliance helps financial institutions monitor their customers’ transactions for suspicious activity. RegTech can help by using technology to automate compliance, improve data management, enhance security, and offer greater transparency to customers.
Digital lending guidelines
Finally, fintech regulations also extend to digital lending. The digital lending industry in India has seen significant growth over the past years, making it a key component of India’s fintech sector. This growth is attributed to the reluctance shown by traditional financial institutions to lend money or credit to low-income and credit-deficient entities in the country. As a result, fintech solutions like digital lending have become a more accessible alternative for people.
In 2022, RBI updated their digital lending guidelines to smoothen the digital lending process and protect consumers from unusually high-interest rates of lenders. The new guidelines would keep tabs on unethical loan recovery practices, such as automatic credit increases without the borrower’s consent. The new guidelines also required all regulated entities to have a suitable nodal grievance redressal officer to handle fintech and digital lending-related complaints, creating a necessary and reliable human element in the digital and automated landscape.
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