A Guide to the Fintech Laws and Regulations in India

As fintech grows in India, fintech laws and regulations are becoming inherently important.

Over the years, the fintech industry has developed and has witnessed exponential growth. Financial technology, or fintech, aims to upgrade and automate the use of financial services. It enables businesses, companies, and consumers to manage their financial transactions and payments efficiently. Implementing fintech laws and regulations ensures safety and security to financial institutions, providing services and the customers using them.

Why are regulations necessary in the fintech industry? 

With the evolution of technology, it is becoming difficult for regulators to keep up with the latest technological developments to curate the fintech laws accordingly. Regulators and policymakers have to understand the latest fintech innovations and promote regulations that will enhance its service without compromising its security.

Since fintech is growing, potential threats like frauds, breaches, and danger to cybersecurity are also on the rise. New payment systems and models can compromise security and market integrity. New products and services might be sold to customers who do not realize the risks or cannot provide to meet them. Blockchain, crowdfunding, and distributed ledger technology (DLT) are also developing the dangers of frauds and hacks.

Because of these risks integrated with the finance sector, financial services are the most heavily regulated sector in the world.

Fintech Regulations in India

The regulatory landscape of the fintech sector in India is highly fragmented. There are no particular set of laws and regulations governing fintech services and products in India. With no definite set of rules for fintech services, it becomes difficult to drive the regulatory landscape, but policymakers realized it was mandatory to regulate the fintech sector in India.

• Payment and Settlement Systems Act (2007): This law is the principal legislation, governing the payments regulation in India. This act prohibits the initiation and operation of any 'payment system' in India; without prior authorization of RBI. Payment structures include credit and debit card operations, smart card operations, money transfers, and PPIs.
• Guidelines regulating P2P Lending Platforms: Peer-to-Peer Lending Platform Directions of 2017 prescribe the lender exposure norms and borrowing limits concerning the operations of P2P lending platforms in India.
• NCPI Regulations regarding UPI payments: The UPI Procedural Guidelines, issued by the NCPI, regulate the UPI payments in India. According to this framework, money transfer services through UPI platforms have to be generated by the banks. Banks can engage technology providers to carry out the operation of mobile applications for UPI payments but under the eligibility criteria and prudential norms as prescribed by the NCPI.
• NBFC Regulations: The Reserve Bank of India Act of 1934 governs all NBFCs. According to its regulations, any organization providing fintech services in India will have to be registered by the RBI. According to section 45-IA of the RBI Act, no NBFC can initiate or carry on the business of a non-banking financial institution without obtaining the certificate of registration from RBI.
• Regulations governing Payment Banks: The payment banks do operate as a bank but function on a smaller scale. It cannot provide loans or issue credit cards. These banks are registered as private limited companies and licensed under section 22 of the Banking Regulations Act of 1949. Specific licensing conditions restrict the banks' activities, especially for the acceptance of demand deposits and on payment and settlements.