Fintech
Rbi: Self-regulation – panacea for NBFCs and Fintech disease, Legal News, ET LegalWorld
This year has witnessed some major shake-ups in banking and financial regulation, including the issuance of a detailed self-regulatory framework by the Reserve Bank of India (RBI). With the growth in number, scale and operations of various categories of regulated and unregulated entities, increasing adoption of innovative technologies and increased customer engagement, the RBI is limited in its ability to directly monitor everything. To combat this, and taking a cue from other jurisdictions, the RBI is promoting self-regulation both as a mechanism of indirect oversight over such entities and as a way to promote a culture of compliance, innovation, transparency and consumer protection.
The RBI mandates that a Self-Regulatory Organisation (SRO) be incorporated as a Section 8 company under the Companies Act, 2013 to work with the regulator and industry on regulatory and policy reforms. While industry bodies (such as PCI, IBA) have been around for a while, it is likely that detailed RBI regulations will formalise the governance and operations of the SRO and may address some of the issues that such bodies face.
Following a public consultation, the RBI has issued the omnibus picture which would act as an overarching framework and separately lay down additional sector-specific conditions. Based on this omnibus framework, the RBI has released a invitation request to establish SRO in the NBFC sector, especially for investment and credit companies, housing finance companies and factors. Apart from these three, other types of NBFC (such as infrastructure companies) can also join as members. One of the narratives in the industry is that NBFCs need to be looked at from a different lens than banks in aspects that impact their functioning (such as debt collection), to satisfy their special status. Arguably, NBFC-SRO can help bridge this gap.
Further, the RBI has also released an elaborate SRO framework for the fintech sectorBy encouraging unregulated entities (including entities domiciled outside India) to join the SRO, this reform is a significant development to promote innovation while ensuring consumer protection. Notably, the term “fintech” is also defined for the first time.
Given the vastness and diversity of the fintech sector, the RBI has not currently specified the maximum number of SROs that will be recognised. This is in stark contrast to the NBFC sector, which is limited to a maximum of two SROs. This will allow multiple Fintech-SROs (which may be engaged in different activities within the fintech sector) to co-exist simultaneously. There appears to be a deviation in the fintech framework from the omnibus framework in relation to the power to impose fines. Although not permitted under the latter, the RBI has allowed the Fintech-SRO to impose fines on its members with the caveat that they are reasonable and not prohibitive. The RBI has also included provisions to ensure that the SRO is a diverse body, without influence or dominance by any one member. For example, a cap on 10% shareholding and rotation of directors for senior board positions. SRO membership is voluntary, however, companies are recommended to participate in at least one SRO.
A recognized SRO could bridge the gap by providing industry-specific insights to both the regulator and participants. By maintaining a unified voice of the industry, the SRO could play a crucial role in formulating policies and promoting overall growth. Once recognized, the RBI can consult the SRO periodically, which can keep the industry informed about upcoming policy changes and help them prepare for timely compliance.
- Published on Jul 5, 2024 at 01:03 PM IST
Most Read in Opinions
Join the community of over 2 million industry professionals
Sign up to our newsletter to receive the latest insights and analysis.
Download the ETLegalWorld app
- Get real-time updates
- Save your favorite articles