The Reserve Bank of India has unveiled a draft framework outlining the broad functions, governance standards, and eligibility criteria for establishing self-regulatory organisations (SRO) for fintech companies. The RBI has sought industry input on whether to create a single SRO or multiple SROs, noting that a single SRO-FT could potentially dilute some industry concerns. However, the draft norms also emphasise that having multiple SROs might weaken the representative character of self-regulation. The RBI is now seeking consensus on these issues, as effective self-regulation cannot be achieved without it.
India’s fintech sector is experiencing rapid growth due to increasing demand for digital payments and loans. Release of the framework by the RBI indicates significant growth in the sector. The RBI will soon invite applications for the establishment of an SRO, either for the entire fintech sector or specific sub-sectors. The number of SRO-FTs to be established will depend on the nature and number of applications received.
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Role of SROs in fintech
India’s fintech ecosystem, the third-largest globally, is undergoing rapid expansion and is projected to reach $70 billion in annual revenue by FY30, according to Elevation Capital and McKinsey India. This sector requires effective regulation to ensure both its potential is realised and consumer concerns are addressed.
The primary role of the SRO will be to ensure a balanced approach towards fostering industry innovation while meeting regulatory priorities in a manner that protects consumers and mitigates risk. The RBI recognises self-regulation within the fintech sector as a preferred approach for maintaining this balance.
The SRO-FT will be expected to actively participate in regulatory discussions, contributing to the development of a regulatory environment conducive to innovation. Membership in the SRO-FT should be voluntary, with fintech companies being encouraged by the RBI to join a recognised SRO-FT. The draft framework stipulates that SROs in the fintech sector must operate independently and be free from the influence of any single member or group of members, ensuring the SRO’s credibility with both industry participants and regulators like the RBI.
Additionally, the draft mandates that SROs should be development-oriented and viewed by members as a legitimate arbiter of disputes. The establishment of an SRO for the fintech sector also aims to reduce the regulatory burden on the RBI.
An SRO should be set up as a not-for-profit organisation, demonstrating sufficient net worth and the capability to establish the necessary infrastructure to fulfil the responsibilities of an SRO. The SRO will be tasked with motivating its members to align with regulatory priorities and foster a compliance culture. The RBI reserves the right to appoint observers to the SRO’s board and may inspect or arrange for the audit its books.
With over 9,000 fintech companies, India ranks third globally in the number of fintechs and accounts for 14% of Indian startup funding. The sector is expected to create $400 billion in value by 2030, a fourfold increase from its current level.
The rise of the fintech industry parallels the growth of the Indian startup ecosystem in recent years. Increased internet penetration and smartphone access have led to a surge in demand for automated financial services like online banking, mobile payments, robo-advisors, and cryptocurrency platforms. Many Indian fintech startups initially offered services like digital payments, as seen with Paytm and PhonePe, and credit card payments, like CRED. Now, these startups are exploring digital lending to enhance their revenues.
Consequently, the government and the RBI are concerned about the risks associated with startups offering credit access, highlighting the need for enhanced regulation in the fintech sector.
While the RBI has already implemented measures to improve consumer safeguards, such as barring non-bank prepaid payment instrument (PPI) issuers from loading PPIs with credit lines and increasing risk weightage for unsecured consumer loans, the introduction of these draft rules will further strengthen the oversight of the fintech industry and mitigate potential threats. The norms follow RBI Deputy Governor T. Rabi Sankar’s call for the creation of SROs in the fintech sector. Stakeholders have until February 2024 to provide feedback on the SRO draft framework, setting the stage for the finalisation of these regulations.