Unauthorised fintechs, compliance changes pose major risks for sector

Even as lending by financial technology (fintech) companies continues to rise, the sector faces major risks, including the presence of unauthorised fintech lenders, changing compliance norms, and evolving regulations, among others.

 

Lenders—including banks, non-banking financial companies (NBFCs), and fintech firms—continue to encounter key operational risks such as cyber frauds and crimes, rising costs, unfair conduct practices, and reputational risks, according to a joint report by fintech self-regulatory organisation (SRO-FT) the Fintech Association for Consumer Empowerment (FACE) and Grant Thornton Bharat.

 

However, these organisations assess other challenges, such as talent, transparency, and grievance redressal, as negligible risks in their operations.

   

The risk assessment in the sector comes as India’s fintech industry and digital lending firms sanctioned 10.19 crore loans in financial year 2023 (FY23), with the loan value pegged at Rs 1.46 trillion.

 

Respondents to the survey noted that changing regulations for fintech lenders posed a high risk for business operations, creating an uncertain business environment, slowing down innovation, affecting investment sentiment, and complicating compliance efforts.

 

“When companies face higher compliance costs and operational inefficiencies, these costs are often passed on to consumers through higher prices or reduced service quality,” the report said.

 

This was followed by risks arising from non-compliance with norms set by the banking regulator. Non-compliance was ranked as the second-most severe risk for business continuity by lenders.

 

“Fintechs work with multiple regulated entities, and varying and inconsistent interpretations lead to compliance and operational challenges. Overall, there has been higher scrutiny and more supervisory actions across banks and NBFCs,” the report said.

 

Recently, the Reserve Bank of India (RBI) barred four non-banking financial companies (NBFCs), including two microfinance institutions (MFIs), from sanctioning and disbursing loans for charging exorbitant interest rates to borrowers.

 

These included Asirvad Microfinance, Arohan Financial Services (also an MFI), DMI Finance—which provides personal, consumption, and micro, small, and medium enterprise loans—and Flipkart co-founder Sachin Bansal’s Navi Finserv, which offers home and personal loans.