The Reserve Bank of India (RBI) has released a draft framework defining the general functions, governance norms and eligibility criteria for setting up a self-regulatory organisation (SRO) for fintech companies. Why is such a body necessary? Mint explain :
What is the RBI concerned about?
Fintechs play a vital role in the Indian financial system by saving time, improving access and reducing costs. However, concerns remain. The Indian fintech sector is largely unregulated and, from time to time, issues arise around data privacy, cybersecurity, grievance management and internal governance. The RBI acknowledges the impact that fintechs could have on financial stability due to poor lending standards. The rise in fraudulent loan apps, in the wake of the rapid growth of digital lending, has added to the concerns. Moreover, a rush to roll out products and services could compromise market integrity and customer protection.
What exactly should an OAR do?
This is the RBI’s second attempt at creating an SRO for the fintech sector. In 2020, it had issued guidelines for a payments SRO. This time, the SRO is expected to cover the entire fintech sector. As per the proposed norms, the SRO is expected to be a non-governmental organisation that is expected to identify a path towards phased regulatory compliance. It is expected to collaborate with the central bank on developments in the sector and on developing and updating the fintech taxonomy. The SRO is also expected to put in place a code of conduct to foster transparency, fair competition and consumer protection.
How big is the fintech industry in India?
According to the RBI, India has the largest fintech ecosystem in terms of number of entities. The Indian fintech market is expected to reach $150 billion by 2025, a sharp increase from $50 billion in 2021. This projection indicates that by 2030, the sector could potentially contribute around 13% of the total revenue of the global fintech industry, the RBI estimates.
Are there any good people for the SRO?
SROs should have members from entities of all sizes and industries. If there is insufficient representation at the time of application, a roadmap towards greater representation should be provided. The Fintech Association for Consumer Empowerment, Digital Lenders Association of India, Payment Council of India (PCI), and Fintech Coverage Council (FCC) are some of the industry bodies that may apply for an SRO license. The FCC has over 150 members while the PCI has over 120. Others have fewer.
What are the other challenges?
The RBI has raised the question of how an SRO will create incentives for membership. Should it have only unregulated members, or should there be regulated fintechs (those with an NBFC license) as well? The RBI has also left it to the industry to decide how many SRO fintechs would require recognition. “Given the diverse nature of fintechs, limiting it to a single SRO could dilute some of the industry’s concerns, while having multiple SROs could undermine the representative nature of self-regulation,” it said.