This year has seen major upheavals 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 the number, scale and operations of various categories of regulated and unregulated entities, increased adoption of innovative technologies and heightened customer awareness, 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 for indirect oversight of such entities and as a means to foster a culture of compliance, innovation, transparency and consumer protection. The RBI requires a Self-Regulatory Organisation (SRO) to be incorporated as a Section 8 company under the Companies Act, 2013 for the purpose of liaising with the regulator as well as the industry on policy and regulatory reforms. While industry bodies (such as PCI, IBA) have been in existence for some time, the RBI’s detailed regulations are likely to formalise the governance and operations of SROs and may address some of the challenges faced by these bodies.
Following a public consultation, the RBI has released the Bus frame which would serve as a general framework and separately define additional conditions specific to each sector. Based on this general framework, the RBI has issued a call for invitation establish OAR in the NBFC sector, particularly for investment and credit companies, housing finance companies and factors. In addition to these three types of NBFC (such as infrastructure companies) are also allowed to become members. One argument in the industry is that NBFCs need to be viewed from a different perspective than banks on aspects that impact their operations (such as debt recovery), to reflect their unique status. The NBFC-SRO can likely help bridge this gap.
In addition, the RBI has also released an elaborate SRO framework for the fintech sectorBy encouraging unregulated entities (including entities domiciled outside India) to be part of the OAR, this reform is a significant step forward in promoting innovation while ensuring consumer protection. It is worth noting that the term ‘fintechs’ is also defined for the first time.
Given the vastness and diversity of the fintech sector, the RBI has not yet 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 involved in various activities within the fintech sector) to co-exist simultaneously. There appears to be a deviation in the fintech framework from the omnibus framework with respect to the power to impose monetary penalties. While this is not permitted under the omnibus framework, the RBI has allowed the Fintech SRO to impose monetary penalties on its members, provided 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 member. For example, a maximum holding limit of 10% of share capital and a rotation of directors for important board positions. Membership in a self-regulatory organization is voluntary, but it is recommended that companies participate in at least one self-regulatory organization.
A recognised self-regulatory organisation could fill this gap by providing sector-specific information to the regulator and participants. By maintaining a unified voice of the industry, the self-regulatory organisation could play a crucial role in policy formulation and promoting overall growth. Once recognised, the RBI can consult the self-regulatory organisation periodically, which can keep the industry informed about upcoming policy changes and help it prepare for timely compliance.
