A year of reckoning for Indian fintech startups as RBI tightens the rules
The Reserve Bank of India spearheaded significant regulatory actions in 2024, addressing fraud, compliance lapses, and lending practices in the fintech sector.
The Indian fintech space has grown into one of the world's largest ecosystems, bringing numerous innovations that have made payments and financial services accessible to millions.
However, these advancements have also come with considerable challenges. Internet and card-based banking frauds quadrupled in FY24, according to an annual report from the Reserve Bank of India (RBI).
The RBI's supervisory returns reveal a staggering 29,082 instances of credit/debit card and internet-based fraud in the financial year 2023-2024—an alarming 334% increase compared to the previous fiscal year, which reported 6,699 such instances. Clearly, measures to address these issues were urgently needed.
Regulatory crackdowns and their impact
In January, Paytm Payments Bank faced significant regulatory action when it was barred from onboarding new customers and forced to halt all banking services due to non-compliance with Know Your Customer (KYC) norms.
The move had a dramatic impact on Paytm’s stock, which plummeted immediately and bottomed out at nearly Rs 317 per share over the following months.
“It created great urgency among fintech players to get their systems in line,” said a fintech investor on the condition of anonymity. “It was a reminder that compliance is non-negotiable, no matter how big you are or how many customers will be affected.”
The RBI’s directive also forced Paytm Payments Bank to cease onboarding new UPI customers and freeze key payment services, significantly impacting its market position. However, in October, the company received approval from the National Payments Corporation of India to resume UPI registrations, regaining a crucial growth lever.
Since then, Paytm has made a full recovery from January’s regulatory setbacks. Its shares, on December 27, were trading at over Rs 990 per share, erasing the losses triggered by the RBI’s sanctions earlier this year.
Peer-to-peer lending under scrutiny
Paytm was not the only company to face regulatory action. The RBI revised its framework for non-banking financial companies facilitating peer-to-peer lending (NBFC-P2P) to curb malpractice and enhance transparency in the sector.
The updated regulations prohibit NBFC-P2Ps from assuming any credit risk, either directly or indirectly. Previously, platforms were not allowed to provide credit enhancement or guarantees, but the revised guidelines go further, ensuring that lenders bear the full risk of principal and interest loss.
Startups like LenDenClub and IndiaP2P quickly adapted to the new regulations by introducing updated features and processes. However, other players have struggled to adjust. Cred and BharatPe, for example, have put all new P2P investments on hold.
Investors, too, have felt the impact. MobiKwik Xtra, a P2P lending service managed by NBFC-P2P Lendbox, previously promised anytime withdrawals. However, following the RBI’s crackdown, Lendbox halted all secondary sales, forcing some investors to wait until 2026 to access their funds.
“This year has been nothing short of transformative for the P2P lending industry,” said Bhavin Patel, Founder & CEO, LenDenClub.
“Regulatory reforms like these are crucial—they may seem challenging in the short term, but they pave the way for long-term innovation and growth. These changes are a win for everyone—platforms, lenders, and borrowers. However, a few of the points are truly restrictive and discouraging innovation,” Patel added.
Lending practices under fire
In October, the RBI took action against DMI Finance and Navi Finserv due to concerns over their pricing policies. Sources indicate that Navi’s interest rates, which were as high as 35%, were a key point of contention.
Many digital lenders criticised the move, questioning why NBFCs were being targeted while credit card companies charging similar or higher interest rates were left untouched. They argued that interest rates and fees are already required to be fully disclosed to customers under an RBI mandate issued in February.
The RBI lifted restrictions on Navi Finserv earlier this month, allowing the NBFC to resume loan sanctioning and disbursal activities.
“In the evolving regulatory environment, it will be important for fintechs to balance innovation, put in place robust risk management strategies and adhere to regulatory guidelines, thereby helping customers build trust in digital financial solutions,” said Akshay Mehrotra, Co-founder & CEO, Fibe, a fintech firm.
Self-governance
While some critics argue that RBI's approach is too heavy handed, it has also paved the way for more self-governance.
In May 2024, the RBI introduced a framework for establishing self-regulatory organisations in the fintech sector. The initiative aims to balance innovation with safeguards for customer protection, data privacy, and cyber security while promoting self-governance among fintech entities.
Self-regulatory organisations are envisioned to set industry standards, ensure compliance with laws, and act as neutral bodies to resolve disputes within the fintech community. By fostering a culture of accountability and collaboration, the framework encourages fintech firms to voluntarily align with ethical and operational best practices.
On August 28, the RBI announced that the Fintech Association for Consumer Empowerment had been recognised as the first self-regulating organisation in the Indian fintech sector.
“This growth [of the fintech sector] is bolstered by various regulatory initiatives, with the Fintech self-regulatory organisation playing a pivotal role in shaping the sector. It will promote a culture of collaboration between the regulator and industry players and help improve self-regulation and compliance within the industry," said Mehrotra.
"Besides, it will further create a more transparent ecosystem, ensuring consumer protection. As we move forward, three pillars—self-regulation, risk management, and customer education—will remain central to building a more inclusive, resilient, and innovative digital financial ecosystem."
Edited by Affirunisa Kankudti