FinTechRegTech in India: Revolutionizing Compliance in a Digital Economy

INTRODUCTION

As the financial landscape becomes more dynamic, the complexities of regulations increase, particularly in the heavily regulated sectors, and this has made it progressively difficult to comply; however Regulatory Technology (‘RegTech’),  opens a new landscape with innovative solutions for reducing regulatory risk, streamlining compliance processes, and enhancing operational efficiency.

Recent technological advancements, increased digitization of financial services in India, and increasing regulatory burdens drive the momentum for RegTech in India.

THE CONCEPT OF REGTECH

RegTech is what is described as the application of technology to help businesses better comply with regulations. It uses technologies such as blockchain, artificial intelligence (‘AI’), machine learning (‘ML’), big data analytics, and analytics in automating compliance procedures, tracking risks, and ensuring that rules and regulations have been complied with.

The Indian regulatory environment is complex, with more than one authority ensuring compliance, such as the Reserve Bank of India (‘RBI’), the Securities and Exchange Board of India (‘SEBI’), the Insurance Regulatory and Development Authority of India (‘IRDAI’), among others.

RegTech provides much-needed relief to enable companies to cut through the associated web of laws and regulations. Regulation technology is decreasing the substantial amount of manual involvement that goes into gathering, structuring and analysing much of the information and data required for revelation to authorities for several other closely related activities.

KEY FACTORS INFLUENCING INDIA’S ADOPTION OF REGTECH

The RBI and SEBI have brought in various stringent standards to address issues concerning consumers, fraud, and transparency. In this context, the relentless hike in the demand for RegTech solutions is driven by the swelling burden of regulatory compliance on organizations across India. There has been an increase in financial sector regulation in the country in recent years with an explosion of fintech, digital payment, and cryptocurrency.

Internet loans, mobile payments, and digital banking give a new face to the Indian financial landscape. However, the change has brought along some new dangers-it includes cybercrimes, money laundering, and data breaches. RegTech solutions help to decrease these risks in financial institutions by offering automated systems of monitoring and reporting that guarantee adherence to rules including Know Your Customer (‘KYC’) guidelines and Anti-Money Laundering (‘AML’).

Manual compliance procedures generally require large teams of experts across various functions, making them often costly and labour-intensive. RegTech automates such operations, therefore freeing up firms to reduce costs, increase precision, and assure speedier compliance with regulatory requirements. For example, AI-powered systems instantly recognize suspicious activity within large datasets and decrease the likelihood of noncompliance.

RECENT DEVELOPMENTS IN INDIA’S REGTECH LANDSCAPE

1. RBI’s circular on Streamlining of Internal Compliance monitoring function – leveraging the use of technology

On January 31, 2024, the RBI issued a directive RBI/2023-24/117 instructing NBFCs, small financing banks, scheduled commercial banks, and other financial institutions to use technology to improve their internal compliance monitoring systems. Following an assessment of current compliance processes, which revealed varying levels of automation and significant manual intervention, the RBI emphasized the need for comprehensive, enterprise-wide, workflow-based solutions.

These solutions ought to make it easier for stakeholders to communicate with one another, track compliance, and give senior management access to a single dashboard.

2. RBI’s Regulatory Sandbox for MSMEs and Cross-Border Payments

SEBI, launched its innovation sandbox (SEBI/HO/MRD-1/CIR/P/2020/95) in June 2020, and revised on February 2, 2021. The sandbox rules of the IRDAI (IRDAI/ INT/ RS/ 2nd / 08/ 2020) then went into force in August 2020. A new cohort focused on Micro, Small and Medium Enterprises (‘MSME’) lending and cross-border payments was introduced in June 2023 as part of the RBI’s Regulatory Sandbox, which has been in operation in stages since 2019. Under regulatory oversight, the program enables fintech and RegTech companies to test cutting-edge compliance solutions. RegTech solutions that automate AML, KYC, and other compliance procedures are included in the regulatory sandbox.

3. SEBI’s Risk Management Framework for Market Infrastructure Institutions

The RBI released extensive rules for the regulation of digital lending platforms (RBI/2022-23/111) in September 2022. Market Infrastructure Institutions’ (‘MIIs‘) risk management methodology was updated by a circular published by SEBI in October 2022. The circular promotes the adoption of RegTech solutions for real-time surveillance, audit trails, and risk identification by MIIs, such as stock exchanges. Automating risk management systems to quickly identify possible market hazards was mentioned in the circular.

4. RBI’s Digital Lending Guidelines

The RBI released Circular DOR.CRE.REC.66/21.07.001/2022-23 on 02, September, 2024 which are the extensive  for the regulation of digital lending platforms in September 2022. According to these regulations, fintech and digital lending platforms must adhere to stringent data protection laws and transparency requirements, utilizing RegTech solutions to ensure compliance. Among the rules was a requirement that loans be paid out and maintained through bank accounts only—not through intermediary service providers. RegTech solutions for fraud detection, risk assessment, and compliance monitoring can also improve consumer protection.

CHALLENGES AND THE ROAD AHEAD

Many such Small and Medium Enterprises (‘SMEs’) do not know much about RegTech solutions and the ways they can streamline compliance. Awareness among companies needs to be increased to apply RegTech solutions in practice across the board. While India has taken significant strides in terms of regulatory innovation, there still are some strains about implementing new laws related to emerging issues such as cryptocurrencies and digital lending. Clear and consistent regulatory frameworks will enhance the confidence about RegTech solutions.

Today, most institutions use legacy systems that do not match the capabilities of modern RegTech solutions. Success in implementation will be marked by overcoming the challenge in adapting  new technologies with an old system.

The face of Indian finance and regulation is changing, and for that scenario, RegTech would play a very strong role in compliance, managing risk, and innovating processes. The future for RegTech in India will be controlled by innovation areas like AI, blockchain, and big data analytics, which will allow better automation and precision in regulatory processes.

The regulatory bodies such as  RBI and SEBI, among others – have begun to encourage innovation with the beginning of regulatory sandboxes. While the demand for RegTech solutions will increase in the process, businesses that will venture into RegTech today will not only cut costs in respect of compliance but will also position themselves better to adapt to future regulation.

AMLEGALS REMARKS

RegTech is changing the face of how regulation works in India and presents new, innovative ways to adhere to compliance requirements that keep costs under wraps and risk away for business. Growing exponential complexity on financial regulations calls for AI-driven KYC processes, automated reporting systems, and data privacy safeguards through RegTech tools. The recent development includes RBI’s Regulatory Sandbox, which speak towards a positive direction of greater collaboration and innovation by regulators. It would surely be fertile ground for the growth of RegTech solutions.

The prospects for RegTech in India seems promising given the momentum of advancement in AI, blockchain, and data analytics moving ahead. Businesses will be better positioned today to adopt these technologies not only to comply with a regulatory environment evolving to keep pace with innovation but also to secure a firm competitive footing in the future digital economy. As regulators continue to facilitate the fast-evolving innovation landscape through sandboxes and industrial collaborations, RegTech will lead the charge in determining what financial services will be like in the future-transparent, efficient, and trustworthy.

– Team AMLEGALS assisted by Mr. Kashish Karia (Intern)

For any queries or feedback, feel free to connect to mridusha.guha@amlegals.com or liza.vanjani@amlegals.com