Fintech
After the RBI guidelines, large players are preparing to apply for fintech SROs – Banking & Finance News
With the Reserve Bank of India (RBI) leaving the door open for multiple self-regulatory organizations (SROs), several entities are looking to get approval for ‘SRO’ license in the fintech sector.
“The PCI will have to submit an application for the OAD in a new non-profit organization as required by the art RBI as we firmly believe that by pivoting to a culture of self-governance, all our members will proactively establish and adhere to industry standards and best practices”, Vishwas Patel, joint managing director, Infrared ray avenues and President of the Payments Council of India(PCI) said.
Apart from PCI, Digital Lenders Association of India (DLAI) and Fintech Association of Consumer Empowerment (FACE) are also vying for an SRO tag. “We are currently discussing various aspects of the guidelines and whether we should seek SRO status,” a spokesperson for the Indian Peer-to-Peer (P2P) Association said.
The RBI, in a much-anticipated move, on Thursday released the regulatory framework for self-regulatory organizations in the fintech sector. According to this framework, any fintech representative organization can apply for recognition as an SRO. Applicants should represent the fintech sector with entries from entities of all sizes, stages and activities.
Specifically, the RBI said the number of SROs to be recognized would be considered based on the number and nature of applications received, thereby allaying concerns about a single SRO structure.
However, entities are expected to achieve a minimum net worth of Rs 2 crore within a year of recognition as an SRO, which could pose a challenge for smaller entities.
“Maintaining such net worth requires significant financial resources, which smaller SROs may have difficulty accumulating. This difficulty in attracting investors or funding is particularly pronounced in niche or less profitable sectors,” said Nikhil Varma, managing partner of MVAC Advocates & Consultants.
“Furthermore, the high financial threshold could exclude individuals or groups with the expertise to contribute to regulatory efforts but without the financial means, thus limiting diversity and inclusiveness within SROs,” he added.
Another SKV Law Offices partner, Shryeshth Sharma, believes the financial threshold could result in less diverse representation within the SRO ecosystem, potentially skewing membership towards larger, more established firms.
Additionally, some experts fear that the requirement that an SRO must represent the fintech sector with members of all sizes, stages and businesses could lead to the disqualification of SROs that focus exclusively on specific subsectors such as lending or payments.
Generally, FACE comprises consumer-facing lenders, DLAI comprises micro-small and medium enterprise lenders, Fintech Convergence Council (FCC) represents lenders and software-as-a-service companies, Payments Council of India represents payment aggregators and prepaid instrument issuers, among others. The P2P Association of India represents peer-to-peer lenders.
The central bank’s representation mandate is designed to ensure that the SRO’s policies and regulations are inclusive and beneficial to the entire fintech ecosystem rather than favoring any particular segment. However, according to experts, this inclusiveness requirement could put specialized SROs at a disadvantage.
“This inclusivity requirement could disadvantage specialist SROs who have deep expertise and strong relationships in their niche areas, potentially excluding them from the opportunity to be recognized as an SRO under the current framework,” Vatsal Gaur, partner, King Stubb & Kasiva, Lo lawyers and prosecutors said.
While the framework aims to create a self-regulatory environment, the RBI retains significant supervisory powers, including the ability to review and withdraw recognition if necessary. This duality can create a tension between the SRO’s autonomy and the RBI’s regulatory control, potentially leading to conflicts and operational challenges, experts say.
Additionally, SROs are required to establish and maintain reliable information technology infrastructure, oversight mechanisms and a grievance redressal framework, and this can pose a challenge for smaller entities.
“The RBI’s objective appears to be to limit the number of SROs recognized and operational; and ensure that recognized SROs are stable and have the resources to fulfill their responsibilities,” said Yajas Setlur, partner at JSA Advocates and Solicitors, adding that many SROs are likely to adapt to the regulations and diversify the membership and scope of their activity.