As the fintech sector continues to gain momentum, India’s central bank has called for the establishment of a self-regulatory body for this burgeoning industry. Speaking at the Global Fintech Fest 2023, Reserve Bank of India Governor Shaktikanta Das emphasized that financial technology companies should proactively create an effective self-regulatory structure. He also highlighted the need to adopt best industry practices. RBI Deputy Governor T. Rabi Sankar echoed these sentiments, emphasizing the necessity of self-regulatory organizations (SROs) to address critical issues such as market integrity, data privacy, and cybersecurity.
The Indian fintech industry is expected to generate approximately $200 billion in revenue by 2030, making it a key driver of economic growth. However, with this sector’s growth comes the imperative for better regulation to prevent mis-selling, privacy breaches, data breaches, and to promote ethical business practices. To future-proof the sector, the RBI has suggested that fintech companies engage in discussions with the central bank about forming SROs. Both the regulator and SROs should collaborate to establish governance standards for the industry.
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SROs in India
As the name implies, self-regulatory organizations are entities, such as non-governmental organizations, with the authority to independently create and enforce industry-specific regulations and standards. India currently has several SROs operating in various segments. One notable example is the Foreign Exchange Dealers Association of India (FEDAI). FEDAI is an association of commercial banks specializing in the Indian foreign exchange (forex) markets. Some core functions of FEDAI include advising and supporting member banks, representing member banks to the RBI, and announcing rates to member banks.
India is currently experimenting with various self-regulatory bodies. Recently, the Google Play Store introduced real-money games on its platform, which have been approved by self-regulatory bodies established under new online gaming rules in India. These online gaming rules, introduced as an amendment to the IT Rules in April of this year, entrust the industry with self-regulation through bodies approved by the IT Ministry.
What Will SROs Do for the Fintech Sector?
Firstly, by allowing the industry to establish a self-regulatory body, the RBI can alleviate some of its regulatory workload, as certain aspects of governance can be overseen by the SRO itself. This also provides the industry with a platform to voice its opinions and requirements more effectively.
The government believes that as regulatory frameworks evolve, SROs can play a pivotal role in upholding ethical practices and fostering responsible growth in fintech. A self-regulatory approach can contribute to the development of a sustainable and reputable fintech ecosystem by promoting growth while mitigating potential risks and adverse consequences. The government is willing to delegate governance of fintech companies to themselves, as it believes that they possess a deep understanding of the industry and are uniquely qualified to develop and enforce effective sector-specific rules.
It is evident that the current regulatory models are not entirely effective in governing fintech companies, given that they are not strictly financial entities. As regulators and fintech firms adapt to an evolving landscape where regulators must understand what requires regulation and fintech firms must understand the products they develop, the most suitable starting point is self-regulation, according to Sankar. An SRO could play a vital role in facilitating collaboration among companies, regulators, and stakeholders, while establishing industry guardrails.
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In July, the central bank announced its intention to introduce more regulations aimed at the developmental support of fintech startups. The RBI has been actively enhancing its regulatory oversight of the fintech industry. Recent initiatives include issuing digital lending guidelines, providing directives on the use of UPI by issuers of prepaid payment instruments (PPIs), and releasing default loss guidelines (DLG).
The RBI’s Executive Director noted that the government is aware of the challenges facing the fintech ecosystem, and the central bank has established a dedicated fintech department to address these challenges and related issues. According to RBI Governor Das, customer-centricity, governance, and self-regulation are three critical concerns in the fintech sector. The apex bank is hopeful that the fintech industry will either have established or be on the verge of launching an SRO by the time of the next GFF event in 2024.