RBI Ramps Up KYC Scrutiny: Banks, Fintechs Brace for Tougher Measures

19 Mar 2024 , 10:35 AM

Paytm may only be the start for Indian regulators looking to take action against any financial industry malfeasance.
The sudden suspension of the majority of the operations of Paytm’s banking subsidiary, a once-flying fintech star that had drawn support from SoftBank Group Corp. and Warren Buffett, startled investors last month. Even though the Paytm case—which purportedly utilized a single identity paper to open thousands of accounts—was an extreme example of a customer verification failure, the authorities’ frustration is evident in their ongoing crackdown.

It is almost impossible to find a day when a bank or fintech company isn’t penalized for neglecting to thoroughly screen its clients, entwining leading lenders like Citigroup Inc. and State Bank of India. Before Governor Shaktikanta Das retires this year, the Reserve Bank of India is expected to become even more strict due to its ongoing deficiencies.

‘A fine is just the start for the RBI; they have plenty of tools at their disposal,’ Gefion Capital Advisors founder Prakash Agarwal stated. ‘Symbolic warning for more dire measures to come, such as a sledgehammer action taken against Paytm bank,’ he said of the penalty.

As lenders scramble to open new accounts and scoop up deposits to fulfill the skyrocketing demand for loans in the major economy that is expanding at the quickest rate, regulatory concerns are developing. Ashok Hariharan, CEO of IDfy, an Indian fintech company that offers client vetting services to banks, says that leakages happen frequently in the last mile of customer verification, which is typically outsourced by most banks to third-party companies or ‘runners.’ 

Big banks are capable of more, but he noted that working with companies that lack stringent fraud and risk teams might be difficult.
Governor Das of the RBI has issued numerous warnings regarding the necessity of enhancing risk management in banks and shadow lenders. The central bank has serious worries about these shortcomings in client verification, notwithstanding the fact that bad debts have decreased over the past ten years.

The interest of customers and depositors is paramount, Das stated this month during a post-monetary policy briefing. ‘The most important thing is to have stable finances.’

Despite increased technological spending by Indian banks to thwart fraud and identify possible money laundering, the number of cases is still on the rise. An RBI data states that from April to September of last year, the number of recorded frauds involving more than ₹100,000($1,205) increased by 68% to over 14,000, nearly double the rate for the preceding six-month period. According to the data, credit card, internet transaction, and deposit fraud instances have increased at the fastest rate.

RBI levied fines of ₹400 Million in the fiscal year that concluded in March, down from ₹650.3 Million the previous year. RBI has the authority to levy a maximum penalty of ₹50 Million for infractions. However, as can be seen on the central bank’s website, the frequency of these fines has substantially increased in the current fiscal year. 

According to IDfy’s Hariharan, ‘people are going to get serious about it now that RBI is getting stricter on KYC.’ ‘KYC is frequently treated with a frivolous attitude.’

Hariharan claims that customer data has been exploited in the nation. According to him, fraudsters typically pay runners ₹500 for the data they obtain from bank customers’ so-called Know-Your-Customer documents. According to him, this enables identity thieves to manage numerous bank accounts from which they obtain funds by tricking victims, mostly via phishing calls.

This month, the RBI not only ordered Visa Inc. to immediately cease a payments service where cards were used to deal with merchants that weren’t permitted to accept such payments, but also issued an order targeting banks.
Still, no recent instance has garnered as much attention as Vijay Shekhar Sharma’s Paytm.

With the largest-ever $2.5 Billion IPO in India in 2021, the company exploded onto the equity markets, drawing in a who’s who of international investors. The Canada Pension Plan Investment Board, Ant Group Co., a major fintech company in China, and Masayoshi Son’s SoftBank were also there.

The regulator has been keeping a close eye on its affiliate business, which accepts deposits and provides payment services akin to those provided by PayPal Holdings Inc. The central bank of India banned Paytm Payments Bank Ltd. on January 31 from taking any new deposits into its customers’ accounts or mobile wallets after February 29. Hundreds of thousands of clients failed to submit their KYC papers, according to a report by Bloomberg News.

The RBI’s action delivered Paytm a severe hit and caused its stock to plummet. The deadline was extended by regulators last week to March 15; in order to clear merchant payments, Paytm is in discussions with additional banks. 

As there are so many connections between banks, fintechs, and other players in the financial system, compliance and accountability are major concerns, according to K.V. Karthik, who oversees Deloitte’s financial services division in India. 

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