The Real Concern Is Whether Fintech Should Be Allowed Regulatory Arbitrage: Former SBI Chairman Rajnish Kumar

The Indian fintech market, with 21 unicorns to date and more than 4.2K active startups, has seen rapid growth in the past couple of years. But the ecosystem is facing new challenges due to the stringent scrutiny of the RBI and its recent mandates. Lately, there have been huge regulatory concerns around the emergence of big tech and fintech and its possible impact, acknowledged Rajnish Kumar, chairman of BharatPe board and former chairman of the SBI.

Speaking at Inc42’s Fintech Summit 2022, Kumar cited the example of China, where regulators are systematically cracking down on technology companies. “I think the political establishment there felt that the likes of Alibaba and Tencent are getting too powerful,” he said.

Indian authorities and regulators have also expressed similar concerns, leading to the recent guidelines, he added.  

“We can expect more regulations, but the real concern is whether fintech should be allowed regulatory arbitrage. Again, if regulatory arbitrage is there, what will happen to the stability of the country’s financial systems?” queried Kumar.

This brings in more uncomfortable questions. For example, if there is no scope for legacy banks for intermediation, what will happen to India’s financial ecosystem? There are more issues as fintech startups have to focus on data breaches and cybersecurity aspects.

“Surely, steps have been taken, and there are systems in place. But the question is: Who is regulating all this? For NBFC and banks, the RBI is regulating such issues. But there has been no supervision for fintechs yet,” he added.

According to Kumar, the challenge before the regulators is the responsibility to ensure that everything is done legally, and they are building no systematic risk. But they have to do it without killing innovation. 

While regulatory issues will continue to be a challenge for fintechs, these startups have to behave (responsibly) as if they are regulated, even if they are not under supervision at this point, he said.

The fintech market in India is estimated to reach $1.3 Tn by 2025, growing at a CAGR of 31%, according to an Inc42 report. Between 2014 and the first quarter of 2022, fintech startups raised $22 Bn in funding, and the average ticket size was $25 Mn in Q1 2022. Among all fintech sub-segments, insurtech is the fastest-growing in India.

However, it must be noted that the funding raised by Indian fintech startups declined by almost 45% to $1.77 Bn during Q1 2022 from $3.2 Bn in the October-December quarter of 2021, a direct impact of the funding winter setting in globally and affecting the overall startup ecosystem in India.