Fintechs should mature if a significant portion of them are offended by the requirement that they follow the rules. Although it is appreciated that they may connect with borrowers who would not otherwise be able to obtain organized credit, many of them have been lending money despite being prohibited from doing so by creatively utilizing various means. As a result of their "innovation," the regulator has good reason to prevent them from operating their companies by renting balance sheets. The regulator's enforcement action against Paytm Payments Bank due to insufficient know-your-customer (KYC) compliance serves as a mere reminder for fintechs to follow the regulations.

During their discussion with the finance minister on Tuesday, fintechs made some fair suggestions. For instance, it's likely that the KYC procedure needs to be streamlined because it's burdensome. The finance ministry has really already committed to looking into this. Fintechs have also requested low-cost capital to be loaned to small borrowers, including startups. That is a fair request, and banks ought to take it into account. It's unclear, though, why fintechs requested that the listing procedure be made simpler.

They must abide by the market regulator's listing requirements since, at the end of the day, they are just financial organizations. As a matter of fact, the regulator made a mistake when it decided to remove the three-year profitability threshold for start-ups. The listing requirements for need to be tightened, if anything. They are free to list elsewhere if some of them feel that the regulations in India are too onerous. Examine the recent developments regarding the share price of One97 Communications, a company whose shares were offered to investors for ~2,150 each. At one point, the stock was trading at around 318, and it is today trading at a sixth of its value.

The truth is that a lot of fintech companies behave carelessly in their chase of rapid profits. The Reserve Bank of India (RBI) has been tightening regulations on digital lending since many of these companies were "borrowing" bank and non-banking finance companies' balance sheets and taking advantage of the gaps. It forbade the loading or reloading of credit lines into prepaid instruments (PPIs), mostly non-bank PPIs, including cards and wallets, in June 2022. This was primarily a result of fintech companies taking advantage of banks. It's concerning that just two banks—one of which was quite weak—accounted for the majority of the exposure.Once more, loan repayments and disbursements were frequently not made through the consumers' accounts as they ought to have been. This is obviously risky because neither the credit bureaus nor the lending system would be aware of the leverage of the customers. Fintechs were pooling the money and taking advantage of the float because they were collaborating with multiple NBFCs. In addition, the customer's credit limit was increased against her will.

The RBI clamped down on FLDG (first loss default guarantee), limited the amount to 5% of the loan portfolio and banning corporate guarantees from being granted, which infuriated fintech companies. Fintechs are guaranteed a stake in the business by FLDGs, but if they fail, the lender would bear the loss, particularly when the guarantees averaged 35%. The regulator cannot be expected to overlook such misdeeds. Fintechs may participate in the financial system, but they must not attempt to manipulate it.