India’s central bank intensifies oversight of fintech sector through rigorous inspections

India’s Reserve Bank (RBI) has ramped up scrutiny of fintech companies, signalling an end to lenient regulation of this pivotal industry.

Following regular inspections in the past year, it was revealed that several fintech firms exhibited leniency in areas such as customer due diligence, prompting the RBI to take decisive action.

The central bank has adopted measures, including hiring analysts to assess customer data and conducting frequent meetings with industry executives.

Last month, the RBI set a precedent for its stricter stance by instructing sector giant Paytm to wind down its banking unit, citing persistent non-compliance with regulations.

This move created a ripple of concern within the sector.

Subsequently, this month, Visa received a separate order from the RBI to cease business-to-business card payments through third-party fintech firms.

In particular, the RBI has expressed unease about the digital customer identification process employed by fintech firms.

This process, reliant on a government identity proof called Aadhaar and a linked mobile number, is faster and cheaper but susceptible to manipulation, raising concerns about fraud and money laundering.

While not prohibiting this method, the RBI has mandated that digitally verified accounts be tagged as 'high risk' until physical or video-call-based identification is completed, in adherence to its regulations on customer due diligence.

As part of its heightened oversight, RBI officials are conducting frequent onsite inspections, randomly selecting samples from fintech firms' user bases to verify authenticity.

The frequency of these meetings has increased from once a quarter to once a month, reflecting the central bank's commitment to more proactive regulation.

Simultaneously, the RBI is investing in advanced technology to detect regulatory violations and hiring analysts to scrutinise vast amounts of customer data held by fintech firms.

While this intensified scrutiny is expected to drive up compliance costs and capital requirements, potentially triggering sector consolidation, industry experts believe it will encourage compliance and deeper diligence.

Reuters cited Ashish Fafadia, Partner at Blume Ventures, who noted that the increased scrutiny will compel support for companies that adhere to regulations, fostering a more compliant fintech landscape.

(With inputs from Reuters)