Anushruti Singh
In the wake of heightened regulatory scrutiny in the Indian fintech landscape, the significance of robust compliance frameworks and regulatory technology (RegTech) solutions has never been more pronounced. SME Futures delves into this critical discourse with Sandeep Agrawal, Co-Founder and Director at TeamLease RegTech, to explore how RegTech solutions can reshape the compliance landscape for fintech companies. Agrawal shares insights on the evolving regulatory environment, the role of RegTech in promoting regulatory compliance, and the future trajectory of RegTech innovations in India’s fintech ecosystem.
Edited excerpts:
How do you perceive the impact of the recent regulatory scrutiny on fintech companies such as Paytm, and what implications does this have for the broader fintech ecosystem in India?
It signifies that the central bank is vigilant and is now maintaining a strict oversight of the fintech industry’s activities. It represents the regulator’s determination to ensure the security and well-being of consumers. It does not impact the public perception of the stability of the fintech ecosystem; rather, it shows that the regulator is watchful. It reinforces the RBI’s enforcement capabilities of discovering and reporting contraventions and creating guardrails inside which fintechs need to function. As such, these enterprises need to remain attentive to their statutory obligations to ensure proper and timely compliance with regulatory requirements.
Considering the RBI’s focus on governance, compliance, and risk mitigation frameworks for fintech companies, how do you see the role of RegTech solutions in addressing these concerns and promoting regulatory compliance?
Fintech is a sunrise industry that has been at the forefront of the growth in the digital economy. In addition to ensuring access to banking and financial services to the underbanked and unbanked sections of society, fintechs have also been at the centre of rising financial fraud. Fintechs are driven by innovation, and RBI is actively tackling the regulatory arbitrage around fintechs’ activities. From digital lending guidelines to digital personal data protection, the regulatory framework for fintechs is evolving at a rapid pace to keep up with the technological advancements in the industry. Therefore, ensuring compliance becomes a top priority for fintech companies to ensure that they stay on the right side of the law.
Compliance and manual paperwork are inextricably linked in India. Sadly, a substantial portion of the nation’s compliance documentation remains manual and has minimal automation/digitalisation. Employers face significant challenges in managing compliance manually, especially due to the substantial volume of compliance requirements. Consequently, unintended delays, defaults, and lapses ensue, giving rise to potential financial and reputational hazards. In the last few years, there have been multiple instances where due to continuous non-compliance, RBI has taken strict actions against several banks, NBFCs and fintech companies. The compliance obligations of an expanding organisation escalate at an exponential rate. Transitioning to digital compliance management can assist organisations in attaining timely, transparent, and precise adherence to regulations. To facilitate compliance, digital compliance software founded on regulatory technology includes, among other things, periodic statutory updates, real time dashboards for compliance statuses, paperless repositories, dynamic workflows, automated alerts and reminders, and timely reports.
RegTech solutions offer a significant improvement in the efficiency, efficacy, and effectiveness of compliance programmes and support in minimising the cost of non/delayed compliances. These platforms provide transparent and real time visibility to the senior management over their compliance status.
The RBI’s recent directive emphasised the need for regulatory compliance in urban co-operative banks. How can RegTech solutions be tailored to meet the specific regulatory requirements of different financial institutions, including banks and fintech companies?
RBI regulates several entities such as NBFCs, Scheduled Commercial Banks, Co-operative banks, Small Finance Banks, and other financial institutions. All these institutions operate in different domains and have differing compliance requirements. These requirements stem from their industry-specific regulatory frameworks. Additionally, these institutions must also comply with other compliance requirements such as those under labour, commercial, environment, health & safety (EHS), finance & taxation, secretarial, and general categories.
RegTech solutions allow businesses to create transparency and accountability within compliance procedures and ensure the timely conclusion of statutory obligations. Employers can stay on top of important changes and address them promptly with the help of compliance management software. Digital, authentic, and tamper-proof copies of all required compliance papers are stored conveniently. While onboarding any RegTech solution, the legal teams of the RegTech players conduct comprehensive compliance applicability assessments to identify the list of applicable acts and compliances. This helps in creating a list relevant to each financial institution.
RBI directives work to continuously evolve the regulatory landscape to keep up with innovations in technology and services. However, it is incumbent upon the institution to create a culture of compliance that adheres to the spirit as well as the letter of the law. Without a supporting culture that prioritises compliance, technological solutions cannot be expected to mitigate and resolve compliance issues within an organisation.
Considering the monetary penalty imposed on Paytm for non-compliance with KYC regulations, how can RegTech solutions assist in implementing robust KYC processes to mitigate such risks and ensure adherence to regulatory norms?
Regulatory requirements like adherence to KYC norms are more transactional in nature as it requires compliance for every new customer account and accordingly the relevant controls need to be built into the transaction system itself. These will be proactive controls and the chances of non-compliance can be eliminated at the root itself. Building separate solutions outside the transaction system will neither be cost effective nor real-time as the entire transactional data will have to be passed on to the Regtech platforms.
The RBI’s action also highlighted concerns about maintaining a suitable distance from group companies. In what ways can RegTech solutions help fintech companies navigate regulatory challenges related to relationships with their parent or group entities?
A couple of RegTech platforms have focused on the development of “Related Party Transaction” (RPT) modules wherein relevant regulatory requirements have been embedded. Additionally, these platforms are integrated into the transaction systems of the financial institutions to facilitate the seamless flow of transactional information between the 02 systems. These systems facilitate effective review, monitoring and prompt actions to stay compliant with several compliance obligations.
How big is the RegTech market in India, and how it is gaining prominence here?
With stricter norms and higher penal provisions, close monitoring by regulators and direct impact on the Board, Independent Director and KMPs, mid-sized and large corporations have started feeling the need for technology adoption for better control over compliance management. There are over 1.6 million active companies in India, and even if we assume that 1% of these have the capacity to invest in RegTech solutions, the RegTech market in India would be close to USD 100 Million. Currently, most companies are dependent on external consultants to manage their compliances as there is no visibility to end-to-end digitalisation of compliances yet.
The government has successfully created a tech-driven compliance ecosystem for GST. When similar initiatives are taken up by more regulators supporting end-to-end digitalisation of compliances, the entire RegTech Industry will get a significant boost and the market will grow multifold.
What advancements or innovations do you foresee in this space to address compliance and regulatory requirements?
The RegTech space has been investing heavily in creating automation layers for compliance document generation and integration with the transaction systems to eliminate any manual touch points. Additionally, they are preparing themselves for API based filings as soon as the regulators are ready to adopt a GST like model and create an eco-system for RegTech players.
For fintech companies, the obvious solution would be the preparation of RBI filings automatically with a backward integration with the fintech’s transaction systems. This will relieve the fintech companies of a lot of compliance requirements which are currently prepared, reviewed and filed manually. These systems will not only increase compliance accuracy but will also reduce the cost of compliance itself.
