The Reserve Bank of India ("RBI") operates as one of the Indian regulators in relation to fintech. Over the years, the RBI has approached the various developments, innovations and disruptions in fintech in a balanced and future oriented manner. This may be pursuant to releasing discussion papers, press notes, frequently asked questions, draft regulations and master directions.

This is a unique, discussion-based approach towards regulating fintech and throws an insight towards the regulatory approach taken by the RBI. In this article we attempt to shed some light on the previous steps taken by the RBI and the quasi-jurisprudence created.

RBI's Internal Approach towards Fintech

It is to be noted that the RBI has not defined fintech in an Indian context. While the term is a contraction of the words 'finance' and 'technology', it is an umbrella term coined in the recent past to denote technological innovation having a bearing on financial services.

The Financial Stability Board (FSB) of the Bank of International Settlements (BIS) has provided the following definition of fintech: "fintech is technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services". While regulators are trying to have a formal definition of fintech, the above description as used by the FSB is preferred by the RBI and has been used in several RBI reports.

In terms of internal allocation of resources by the RBI towards fintech, in June 2018 a fintech unit was set up in the Department of Regulation for acting as a central point of contact in the RBI for all activities related to fintech.

The RBI had a separate fintech division, which was operating within the Department of Payment and Settlement Systems (DPSS) since July 2020. This was made a full-fledged department effective from January 4, 2022 ("Fintech Department"), with a view to give further focus to the area and facilitate innovation in fintech sector.

This Fintech Department has been established to promote innovation in the sector, identify the challenges and opportunities associated with it and address them in a timely manner. The Fintech Department will also provide a framework for further research on the subject that can aid policy interventions by the RBI. Accordingly, all matters related to the facilitation of constructive innovations and incubations in the fintech sector, which may have wider implications for the financial sector/markets and falling under the purview of the RBI, will now be examined by this Fintech Department. Issues related to inter-regulatory coordination and international coordination on fintech would also fall in its domain.

Regulatory Jurisprudence followed by the RBI

Regulations prescribed by RBI are primarily of two types – prudential regulation and conduct of business regulation. While the prudential regulation focusses on solvency, safety and soundness of financial entities and financial system, the conduct of business regulation focusses on how the financial entities are to deal with their customers and includes information disclosure by the entities, their competence, their continuity, and fair business practices.

The RBI does not follow a one size fits all approach when it comes to regulating financial innovation. To the extent, representatives of RBI have spoken in detail about the requirement of regulating financial innovations, including the arguments against regulations.

The argument against regulating financial innovation is that it serves the interests of the financial service providers and is mostly detrimental to consumers. This is primarily due to reduction in competition and the resultant increase in costs. However, it is to be also noted that the absence of financial regulation leading to unregulated financial systems can force the establishment of external regulation. With the growing dependency on fintech, the scale of financial transactions is growing and an un-regulated sector could lead to unforeseen issues which could be detrimental to customer interest and who may then seek government/ regulator intervention. Therefore, regulations to an extent can prevent such future incidences,.

The RBI has employed several approaches while examining whether a financial innovation should be regulated. They include:

  1. To ignore
  2. To watch out
  3. To regulate passively
  4. To regulate actively, and
  5. To ban

RBI's approach can be broadly categorised into the following regulatory principles:

  1. Can the innovation cause large scale damage; then ban it.
  2. Is the size or magnitude very small; then ignore it.
  3. Can an informed decision be taken by the consumers; then caution them.
  4. Can it be beneficial to many consumers; passively regulate it with light touch regulation.
  5. Can it be beneficial to many consumers, but consumer protection issues loom over; then actively regulate it.

Regulatory Forecast and Public Discussion Approach

The RBI has consistently followed an approach of forecast of the challenges faced and the resultant changes being proposed.


The RBI has been releasing Payment Vision Documents every couple of years. The first Payment Vision document was released in 2001 setting out the objectives for the period of 2001 – 2003. The latest Payment Vision Document has been released in 2022 and sets out a vision till 2025. In the current vision, RBI has chosen the core theme of 'E-Payments for Everyone, Everywhere, Everytime' (4Es). Across the 5 (five) anchor goalposts of integrity, inclusion, innovation, institutionalization and innovation, RBI proposes to take up 47 initiatives to achieve its vision for 2025.

Public Discussion

In 2016, the RBI decided to set up an inter-regulatory working group to investigate and report on the granular aspects of fintech ("Fintech Working Group") and its implications for the financial sector to review and reorient appropriately the regulatory framework and respond to the dynamics of the rapidly evolving fintech scenario. The Fintech Working Group included representatives from RBI, SEBI, IRDA, and PFRDA, from select financial entities regulated by these agencies, rating agencies such as CRISIL and fintech consultants / companies.

This Fintech Working Group released a report on fintech in November 2017 which provided multiple recommendations in relation to fintech. The report did mention that regulatory uncertainty surrounding fintech could potentially hamper its development. One of the recommendations was that regulatory actions may vary from "Disclosure" to "Light-Touch Regulation & Supervision" to a "Tight Regulations and Full-Fledged Supervision", depending on the risk implication.

On August 10, 2022, the RBI, released a press note in relation to digital lending, which in a staggered approach, implemented certain recommendations, previously provided in a report dated November 18, 2021, on digital lending by a working group constituted by the RBI. ("Digital Lending WG Report"). Certain recommendations of the Digital Lending WG Report have been implemented on an immediate basis by this press note. Certain additional recommendations of the Digital Lending WG Report were classified as: (i) accepted in-principle but requiring further examination; and (ii) requiring wider engagement with the Government of India and other stakeholders in view of the technical complexities. Subsequently, on September 02, 2022 the RBI released certain Guidelines on Digital Lending.

This approach of a working group providing recommendations to the RBI is a very inclusive method of determining the requirement and extent of regulation in relation to financial innovation.

Other Regulatory Steps taken by the RBI

The RBI has also set up a regulatory sandbox mechanism to allow fintech companies to test their products and system in a controlled regulatory environment. The regulatory sandbox allows the regulator, the innovators, the financial service providers (as potential deployers of the technology) and the customers (as final users) to conduct field tests to collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks.

On June 20, 2022, the RBI prohibited all non-bank prepaid instrument issuers from loading prepaid instrument with credit lines. This will affect the growing buy now pay later model of lending wherein non-bank lenders were utilising credit lines to fund 'pre-paid instruments'.

On August 17, 2022, the RBI released a discussion paper on "Charges in Payment Systems" for public feedback. In this discussion paper the existing mechanism and rules for levying charges on payment systems has been detailed along with other alternate options. The RBI proposes to seek feedback on the proposed and existing charges for payment systems.

Recently, on October 07, 2022 the RBI released a concept note on 'central bank digital currency'. The intention of the RBI behind this concept note is to create awareness about digital currencies and the possible use cases of the same. In this note, the RBI clarifies the approach that it may take towards the launch of 'digital rupee'.

Challenges faced by the RBI

With the growing number of fintech products, the instances of fraud and cheating through some fintech platforms has also increased. The RBI has been steadily addressing this problem by regulating for more information to be provided to the customers. As of June 2020, each fintech lending platform is required to disclose the name of the lender who is providing the credit facility. Similarly, the RBI has implemented an ombudsman scheme for digital transactions to ensure a grievance redressal forum for the customers.

Another challenge being faced is that of unregulated digital lenders operating in the market and charging exorbitant interest rate and high service charges.

The RBI is also constantly required to understand and evaluate the innovative steps being taken by the fintech players. A constant rule- based approach will not be conducive for regulating financial innovation. A regulatory requirement which may be suitable for one product, may be restrictive for another.


The RBI has always encouraged innovation in the financial system, products, and credit delivery methods. At times, the most important initial step that a regulator can take in this regard is of not taking any steps. In the event every new product is regulated, then it will lead to stifling of innovation and may result in providing legitimacy to certain products which may be detrimental to the economy and the public in the long run.

In this light, the RBI's initial approach of 'ignore' and 'wait and watch' has been conducive to development of initial innovation in the financial sector in India. However, this has led to some additional challenges as well. With the passage of time and dependent on risks and extent of public effect, the RBI may step in to regulate products with 'light touch' or 'active' regulations.

We are at a very interesting stage in the 'Indian fintech regulation' journey. It is expected that over the next few years, along with the evolution of the Indian fintech sector, the RBI will slowly move towards implementing more 'active' regulations.

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