Modules for Traders
India's fintech journey
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Regulations around the fintech industry
As we’ve already seen in the previous chapters of this module, the fintech industry in India has seen a meteoric rise over the recent years. Considering that the industry relies on technology to provide financial services, the need for oversight is paramount to ensure safety and security for both the consumers and the entities providing the service.
Several fintech regulatory bodies like the Reserve Bank of India have come up with rules and regulations that govern the fintech industry and the entities in it. And that’s precisely the theme that we’re going to explore in this chapter. Let’s get on with it.
The Laws and Regulations Governing Fintech in India
Considering that the financial services sector in India is one of the most regulated industries, it is natural for several rules and fintech regulations to exist. Here are a few of the most important fintech laws and rules that you need to know.
Payment and Settlement Systems Act (2007)
Also known as the PSS Act, the Payment and Settlement Systems Act was passed in the year 2007. It is one of the few principal fintech laws that regulate payment systems in India. According to the act, starting of and operating a payments system within the country would require the express approval of the Reserve Bank of India (RBI). The Act covers all sorts of payment systems including credit cards, debit cards, smart cards, PPIs, and money transfer operations.
NPCI Regulations regarding UPI payments
The National Payments Corporation of India (NPCI) is the creator of the Unified Payment Interface (UPI). So naturally, the entity has enacted several rules and fintech regulations to govern payments made through UPI. According to the rules laid out by NPCI, only scheduled commercial banks are permitted to integrate with the UPI platform created by it. Also, banks are allowed to engage technology service providers to design and operate UPI mobile apps on behalf of the bank, provided they satisfy the eligibility and other prudential norms.
Regulations governing NBFCs
Non-Banking Financial Corporations (NBFCs) are one of the major lifelines of credit for individuals and businesses alike. And since they provide lending services, they come under the purview of the Reserve Bank of India. The RBI has detailed rules and regulations that specify the eligibility criteria for an entity to be classified as an NBFC. According to the rules specified by RBI, any fintech entity wanting to provide financial services within the country is required to be registered with it as an NBFC.
Regulations governing Payment Banks
Payment banks are a special category of financial institutions that are allowed to operate as banks, but with certain restrictions. They operate on a much smaller scale and are barred from providing loans or credit cards. Although payment banks are registered as private limited companies, they’re licensed by the RBI under section 22 of the Banking Regulations Act of 1949.
Regulations governing P2P Lending Platforms
Peer-to-Peer lending has been catching on in India for quite some time now. And so, in a bid to regulate the activities of such P2P lending platforms the Peer-to-Peer Lending Platform Directions were passed in the year 2017. The rules and regulations under the act clearly specify the exposure norms that a lender has to adhere to and puts a cap on the borrowing limits to be followed by the lending platforms.
With Fintech platforms collecting and storing a wealth of customer information which include their personal information, financial information, and more, protecting such sensitive data is of paramount importance.
However, currently in India, we only have two acts - The Information Technology Act, 2000 and the IT (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011.
That said, we also have a fintech regulatory framework for data protection and privacy on its way as well. In addition to all of this, the Reserve Bank of India (RBI) has also come out with its own security measures to prevent and mitigate data leaks.
Regulatory Bodies in the Indian Fintech Ecosystem
Now that you’ve seen the several fintech regulations governing the industry, let’s take a look at the fintech regulatory bodies behind the same.
Reserve Bank of India (RBI)
The Reserve Bank of India is the primary entity behind all the rules and regulations governing banks, financial institutions, and payment solutions providers in India. And by extension the RBI is also the main entity behind fintech rules and regulations. Although the entity started off with a light-footed approach to fintech companies, it has now taken on a more active and proactive role when it comes to regulating them.
National Payments Corporation of India (NPCI)
As you know, the NPCI is the entity behind the creation of UPI and other retail payment and settlement systems within the country. The NPCI, although an independent entity, was created as a result of a joint initiative by the Indian Banks’ Association and RBI.
Unique Identification Authority of India (UIDAI)
The UIDAI is the entity behind the Aadhaar programme, which is the largest identity programme in India. The entity is responsible for enacting rules and regulations that fintech companies would have to adhere to when on-boarding and verifying customers through Aadhaar.
Fintech Regulatory Sandboxes
In the year 2018, the Reserve Bank of India came up with the idea of a regulatory sandbox for fintech companies. The sandbox would allow fintech startups, banks, and financial institutions to conduct product testing within the regulatory sandbox as long as they satisfy the minimum eligibility requirements as laid out by the RBI. The main aim of the establishment of the sandbox was to highlight gaps, if any, in the financial ecosystem and to work out ways through which the said gaps could be bridged.
Taking ideas from the regulatory sandbox proposed by the RBI for fintech companies, IRDAI and SEBI have also proposed to start up regulatory sandboxes dedicated for fintech insurance companies and fintech asset management companies respectively. Now that you’ve seen what the various fintech laws currently in India are, we’ll be taking a look at what the future trajectory of the fintech industry is likely to be in the final chapter of this module.
A quick recap
- The Payment and Settlement Systems Act (2007) is one of the few principal fintech laws that regulate payment systems in India.
- The NPCI has enacted rules that allow only scheduled commercial banks to integrate with the UPI platform created by it.
- The RBI has detailed rules and regulations that specify the eligibility criteria for an entity to be classified as an NBFC.
- According to the rules specified by RBI, any fintech entity wanting to provide financial services within the country is required to be registered with it as an NBFC.
- The Peer-to-Peer Lending Platform Directions were passed in the year 2017 in a bid to regulate the activities of such P2P lending platforms.
- The fintech regulatory bodies behind the regulation of the industry are - the RBI, the NPCI, and the UIDAI.
- In the year 2018, the Reserve Bank of India came up with the idea of a regulatory sandbox for fintech companies.
- The sandbox would allow fintech startups, banks, and financial institutions to conduct product testing within the regulatory sandbox as long as they satisfy the minimum eligibility requirements as laid out by the RBI.
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