The Reserve Bank of India (RBI) on Monday (January 15) issued draft norms for self-regulatory organisations (SRO) for the fintech sector to ensure compliance with statutory and regulatory requirements.
The central bank left the room open for having multiple fintech SROs (SRO-FT).
“Given the diverse nature of fintechs, restricting to one SRO-FT could dilute some industry concerns, while having multiple SRO-FTs could undermine the representative character of self-regulation. A consensus on these issues would be crucial to the effectiveness of self-regulation,” the RBI said.
The central bank said it would invite applications for the SRO for the fintech sector, either for the entire sector or for specific sub-sectors, as and when required. The number of SRO-FTs to be recognised would be considered based on the number and nature of applications received.
The development comes at a time when India’s fintech space has been rapidly growing, fuelled by increasing demands for digital payments and loans.
Functions Of SROs
The draft framework said that SROs for the fintech sector should operate independently, i.e. free from the influence of any single member or group of members. Besides, they should be development-oriented, actively contributing to the growth and evolution of the industry, as well as members should perceive it as a legitimate arbiter of disputes.
The SROs would ensure adherence to industry standards and facilitate a transparent communication channel with the RBI, the draft norms added.
The RBI further said that the SROs would work towards strengthening governance standards and addressing the sector’s needs and challenges.
“Achieving a healthy balance between facilitating innovation by the industry on the one hand, and meeting regulatory priorities in a manner that protects consumers and contains risk, on the other, is crucial to optimising the contribution of the fintech sector,” the central bank said.
Self-regulation within the fintech sector is a preferred approach for achieving the desired balance, it added.
“A proactive SRO should be capable of motivating its members to align with regulatory priorities. This would involve facilitating communication between industry players and regulatory bodies, advocating for necessary changes, and promoting a culture of compliance,” said the RBI.
The organisation is also expected to consult the RBI in developing and updating the “taxonomy” for fintechs, to carry out any tasks assigned to it, and supply information as directed by the central bank.
The RBI can inspect the books of the SRO or arrange to have the books audited.
The SRO’s board should put in place a framework for the ongoing monitoring of ‘fit and proper’ status of its directors.
The Rise Of Fintechs & Regulations
With increasing internet penetration and access to smartphones, the Indian startup ecosystem has seen the rise of a number of fintech startups over the last few years.
While many of these fintech startups began operations by providing services like digital payments in case of Paytm and PhonePe and credit card payments in case of CRED, most of these startups have turned towards digital lending now to shore up their top lines.
While these startups have succeeded in improving access to credit, the central bank has been worried about the risks associated with this. As a result, it has taken a number of steps to better regulate the fintech sector.
In 2022, the RBI barred non-bank prepaid payment instruments (PPI) issuers from loading PPI with credit lines, dealing a blow to many fintech startups. Last year, the central bank also directed PPI issuers to ‘stop UPI in a cobranding arrangement’.
Later in November, the RBI increased the risk weightage for unsecured consumer loans to check the unbridled growth in unsecured consumer lending. This decision also impacted many fintech startups.
The release of the draft norms is another step by the central bank to better regulate the fintech sector and avoid formation of risks. The release of the norms comes months after RBI Deputy Governor T. Rabi Sankar called for the creation of SROs in the fintech sector.
The central bank has set the end of February 2024 as the last date for sending feedback on the draft framework for the SROs, after which it will issue the final framework.
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