RBI Governor Cautions Against Over-Regulation Impacting Financial Inclusion

Balanced Regulations Essential for Financial Inclusion Growth

Mumbai, March 26: Reserve Bank of India (RBI) Governor Sanjay Malhotra emphasized the need for balanced regulations that do not create unintended barriers to financial inclusion, cautioning against overzealous policymaking that may hinder legitimate economic activities.

Speaking at the Financial Action Task Force (FATF) event in Mumbai, Malhotra highlighted India’s significant progress in financial inclusion, with 94% of adults now having a bank account. However, he stressed that regulatory frameworks should not impose undue restrictions on honest businesses and individuals.

“It must be ensured that regulations do not create unintended barriers to financial inclusion. We need to be mindful of customer rights and convenience while fulfilling the due diligence requirements,” he stated.

Regulations Must Be Targeted, Not Blanket Measures

Avoiding Collateral Damage on Honest Transactions

Malhotra underscored the importance of precision in regulatory measures, urging authorities to focus on illegitimate financial activities with surgical precision, rather than adopting broad, restrictive policies that may stifle economic growth.

“While we continue to make our financial systems safe and secure against money laundering and terrorist financing, we as policymakers need to be mindful that our measures are not overzealous and do not stifle legitimate activities and investments,” he said.

Highlights on Regulatory Approach:

✔ Regulations must not create unintended barriers for financial inclusion.
✔ Over-regulation risks stifling economic growth and innovation.
✔ Due diligence should be balanced with customer convenience.

The Need for a Risk-Based Approach in Compliance

Streamlining KYC to Reduce Burden on Customers

Malhotra called for a risk-based regulatory approach that assesses the impact of compliance requirements on people and businesses. He pointed out that repetitive Know Your Customer (KYC) processes are an unnecessary burden on individuals and financial institutions.

“Stakeholders need to coordinate better and avoid the unnecessary process of making people repeatedly undergo the KYC requirements,” he urged.

Technology: A Double-Edged Sword in Financial Systems

Fostering Innovation While Combating Financial Crimes

Malhotra acknowledged the transformational role of technology in enhancing financial accessibility but warned that it has also enabled sophisticated methods of money laundering and illicit financing.

“We are determined to further strengthen our financial system to deter and combat illicit financial activities,” he asserted.

Key concerns include:
✔ Rise of digital financial crimes and fraudulent transactions.
✔ Need for strong cybersecurity and fraud detection mechanisms.
✔ Ensuring compliance with global anti-money laundering (AML) norms.

Global Financial Compliance and the “Travel Rule”

A Push for Technology-Neutral Regulatory Frameworks

Addressing the global financial community, Malhotra advocated for technology-neutral regulatory standards, particularly regarding the “Travel Rule”—a global compliance measure that mandates financial institutions and Virtual Asset Service Providers (VASPs) to share specific details about the originator and beneficiary of transactions.

“It would be desirable to make the travel rule technology-neutral to ensure uniform application across various financial systems,” Malhotra stated.

His remarks underline India’s commitment to:
✔ Strengthening anti-money laundering frameworks.
✔ Enhancing digital transparency in financial transactions.
✔ Ensuring global regulatory consistency in financial compliance.

New Privacy Law and Its Impact on Financial Regulations

FATF Seminar to Guide Implementation in India

Malhotra also noted that deliberations at the three-day FATF seminar would assist India in implementing its new privacy law effectively. With increasing concerns over data security and financial surveillance, regulators must strike a balance between privacy protection and compliance requirements.

His emphasis on “balanced regulations” suggests that India is focusing on:
✔ Strengthening financial crime detection while protecting privacy.
✔ Reducing compliance burdens for legitimate businesses.
✔ Ensuring regulatory adaptability to evolving financial technologies.