Regulations should safeguard, not stifle: RBI Governor Sanjay Malhotra

Important to make financial systems secure, need to be mindful of not stifling investments

Reserve Bank of India (RBI) Governor Sanjay Malhotra on Wednesday said regulations should not create unintended barriers to financial inclusion while emphasising that the impact of regulations on individuals and businesses should be considered. He also recommended adopting a risk-based approach to regulations to minimise the compliance burden.

 

This aligns with the cautionary stance Malhotra took during the February monetary policy meeting, where he had emphasised that the RBI would strive to strike the right balance between the benefits and costs of every regulation.

 

Speaking at the Private Sector Collaborative Forum of the Financial Action Task Force (FATF), Malhotra said, “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 due diligence requirements.”

 

He said that while it is important to make financial systems safe and secure against money laundering and terror financing, policymakers must ensure that measures are not overzealous and do not stifle legitimate activities and investments.

 

“Therefore, we need to have laws and regulations that, with surgical precision, target only the illegitimate and illicit, rather than use them as blunt tools that unintentionally hurt even the honest,” he said, adding that even while implementing the legal framework and regulations, the impact on individuals and businesses must be considered. A risk-based approach is recommended in this regard, he said.

 

Malhotra also highlighted that India has made huge strides in applying digitalisation to customer onboarding and due diligence processes.

 

“The digital know-your-customer (KYC) and video KYC are shining examples of this. The Central KYC Records Registry, with more than 1 billion records, is another example, which has the potential to usher in a new era of customer onboarding by making it easier and seamless not only for customers but also for regulated entities to perform customer identification and due diligence,” Malhotra said.

 

However, he cautioned that the system must be made more robust, effective, and efficient so that all regulated entities can coordinate and ensure the KYC process is streamlined, preventing unnecessary duplication by different entities for the same person.

 

Separately, Malhotra said that India will continue working toward fulfilling its commitment to effectively implementing the next phase of the Group of Twenty (G20) road map for inclusive cross-border payments by 2027.

 

“To meet the G20 objective of making cross-border payments faster, cheaper, more transparent, and more inclusive, while maintaining their safety and security, it would be desirable to make the travel rule technology-neutral,” Malhotra said, adding that it is only a matter of time before cross-border payments become much easier and cost-effective.

 

He also acknowledged India’s progress in making digital payments accessible, affordable, and convenient.

 

“While card networks have helped developed economies improve payment systems, fast payment systems have enabled emerging market and developing economies to leapfrog in this area,” he said.

 

Malhotra said that India underwent a mutual evaluation by FATF and was placed in the ‘regular follow-up’ category, a distinction shared by only a few other G20 countries. “This is a recognition of our effective anti-money laundering/countering the financing of terrorism framework,” he said.

 

He cautioned that threats from money laundering and terror financing to national and global financial systems are continuously evolving and becoming more sophisticated.

 

“This is primarily due to technological advancements. To effectively counter these threats, we need to continue close cooperation among various stakeholders — government agencies, financial entities in both the public and private sectors, civil society, and others,” he added.