Why chorus around poster-boys can’t drown out regulations

Recent actions by the Reserve Bank of India (RBI) against four NBFCs — Asirvad Micro Finance, Arohan Financial Services, DMI Finance, and Navi Finserv — involved in usurious lending practices, as well as other regulatory concerns have once again sparked debates. The financial sector is highly regulated, and any regulatory action is often perceived as an affront by tech-led companies that approach finance with a mindset of ‘we also do finance’.

Every time a regulatory action is taken against a financial entity with a charismatic and well-known founder, a familiar outcry emerges. The narrative unfolds in predictable tropes: claims that India’s future is at stake, that the regulator is ‘over-reaching’ by punishing the entity for its success, or that global investors will flee in fear, or innovation will stall.

In such moments, supporters of the regulatory action are labelled stooges, while critics argue that the entity, given its or its CEO’s stature, couldn’t possibly have engaged in wrongdoing. But this chorus of defence misses the fundamental point: a licence to operate in the financial sector is not a function of influence, wealth, or reputation. It is an earned trust, demonstrated by compliance with regulatory standards, and by respect for the rules that exist, and unequivocal respect for the regulator.

It was expected for few to argue that clamping down on these business practices will diminish access to credit for the unbanked or underbanked, and drive capital out of India. Some go as far as to say that if these entities were not legitimate, global marquee investors wouldn’t have backed them in the first place. This argument is flawed. While investment might signal faith in the entity’s business model, it doesn’t guarantee alignment with local regulatory expectations, or an entity’s behaviour.

The issue of credit access is another oft-repeated refrain. Critics suggest that if these high-interest lenders didn’t exist, Indian consumers would turn to underground or spurious sources of borrowing. Such an argument is akin to legitimising the illegal moneylender simply because they are the only source of credit for certain groups.

Yet, how morally upright can one claim to be when charging exorbitant interest rates — sometimes as high as 40 per cent — even within the framework of formal regulation? Just because a founder has a history of business success does not absolve them from regulatory responsibility. Their success in previous ventures does not give them carte blanche to operate outside the bounds of regulatory scrutiny, or not being answerable to public stakeholders. After all, they are not in the business of lending out of altruism, but for profit. Sustainable credit models can exist within regulatory guardrails that protect consumers.

We must not conflate regulatory actions taken against individual entities with a broader indictment of the sector. If the issue were with the sector at large, regulators would issue sweeping guidelines for the entire industry. Instead, these actions are targeted at individual entities that have failed to meet the expected standards of compliance. It is also expected that the regulator would act against all those who overcharge that they would qualify as usury, and not punish only those they could find out or make an example of. Else it would be unfair to the many players who work hard to maintain regulatory integrity to suggest that the shortcomings of a few should be overlooked.

Nor should we confuse the charm and innovation of a CEO with regulatory infallibility. Even the most charismatic leaders can fail to adhere to compliance standards. Often, those who see themselves as disruptors believe that pushing the boundaries of regulation is part of their mandate. Innovation within financial markets must occur within the framework of regulatory compliance, and dialogue with regulators is essential to ensure that new models of business can coexist with market stability. When risks are identified, regulators may expand boundaries, but only after the necessary safeguards are in place.

The financial sector must remain grounded in regulatory compliance, regardless of the innovation it fosters. It would be delusional to suggest that a few rule-breaking innovators should be allowed to bulldoze through regulations just because they are viewed as 'visionaries. The financial world is built on trust, and trust is sustained by adherence to the rules that protect the system’s resilience. It is not enough to be a poster boy of tech or financial brilliance. A financial licence is a privilege that must be continuously earned.

Are certain other founders and investor lobbies protesting regulatory actions because some of the ‘celebrity’ CEOs have personally invested in their entities or networks? It seems that these financial entanglements may create a sense of loyalty and obligation, making others in the sector more hesitant to support regulatory scrutiny. Also, many of those supporters might be in the same boat, and wonder when their turn could be up, next. This raises the question of whether the outcry is rooted in genuine concern for innovation or in protecting financial interests.

The founders are not here to save the world — they are here to make a profit. Very rarely do some profit along with a (societal) purpose. Regulators are not infallible. However, their primary duty is to be fair, process-driven, and to provide market stability. They set the tone and pace for regulatory standards and are expected to continuously improve. Importantly, they must remain impartial, regardless of the stature, size, or influence of the entities they oversee, including their founders.

The responsibility of the regulators is not to accommodate the whims of the influential few, but to uphold the integrity of the financial system for the benefit of all.