Finance world's question to self: Are there too many regulators within?

From fintech to urban cooperatives, a host of industry associations have expressed interest in becoming self-regulatory organisations

Just how many self-regulatory organisations (SROs) are too many? Last week, the Reserve Bank of India (RBI) capped the number of such entities for non-banking financial companies (NBFCs) at “a maximum of two”. And to ensure the smaller NBFCs get a fair voice, it said an SRO shall have at least 10 per cent of those in the “base layer” according to the scale-based regulatory framework. In one fell swoop, Mint Road set aside concerns of a proliferation of SROs among NBFCs, given the many kinds of entities at play here: From those into housing finance to large deposit-taking firms.

Should such an approach be extended to SROs in other parts of the financial world?

Ever since the ‘Omnibus Framework for recognition of SROs for Regulated Entities of the RBI’ was put out for public comments on March 21, a host of industry associations have expressed interest in becoming SROs.

In fintech, you have the Fintech Association for Consumer Empowerment and the Digital Lenders’ Association of India. Then you have the Association of Small Finance Banks of India, the Currency Cycle Association (a body within the cash logistics vertical). The business correspondents sector and the National Urban Cooperative Finance and Development Corporation (the umbrella body for urban cooperative banks) may also be in the fray. If each of these sectors is to have an SRO, it makes for five new ones. Add to them two existing SROs in microfinance – Microfinance Institutions Network and Sa-Dhan – and you have seven.

Where is SRO headed as an idea?

“I feel the SRO framework should have been thought through better. If you have multiple SROs, coordination becomes an issue, especially, in the case of financial conglomerates. There also has to be a Chinese wall between a trade or business body and the SRO. Otherwise, it becomes a lobby group,” says M Damodaran, chairperson of Excellence Enablers and former chairman of the Securities and Exchange Board of India.

Now that the RBI has capped the number of SROs in the NBFC space to two, there are whispers it may apply to fintech also. The trouble here is that it’s even more rainbow-like compared to legacy NBFCs. The RBI’s stance is that SRO-FT (fintech) should derive strength from its membership.

It gets more interesting when you consider the fact that legacy banks and NBFCs are going digital. Another intersection between fintech, banks and NBFCs is co-lending. The point: It’s hard to put business into neat silos.

Business Standard has learnt on good authority that fintechs have raised the issue of the number of SRO-FTs with the banking regulator informally.

 “A good way would have been to have a task force and let them come as to how to slice and dice,” says Naveen Surya, former chairman of Fintech Convergence Council.

What if the SRO route were to be mimicked by other financial regulators: The Pension Fund Regulatory and Development Authority, or the Insurance Regulatory and Development Authority of India? Sectoral pulls and pressures will only increase. Are we then to have the equivalent the Financial Stability and Development Council – chaired by the Finance Minister for coordination among financial regulators – for SROs as well?

Another sticking point is the settlement of disputes between two SROs?

“If there’s a difference of opinion between two SROs working in the same sector, the regulator will take a final view on the same. Luckily, we have not had any such situation in our area between the two SROs,” says Jiji Mammen, executive director and chief executive officer, Sa-Dhan. Again, in its circular on SRO-FT(s), the RBI has pointed out that members should perceive it “as a legitimate arbiter of disputes.” That would require a transparent and fair resolution mechanism for disputes arising among members. By handling conflicts and disputes of the members, the SRO-FT should contribute to a stable and harmonious fintech environment. It’s not clear how this will pan out.

Ask Mammen about the experience among microfinance institutions, and he tells you that Sa-Dhan point outs irregularities or deficiencies in the sector to member institutions by way of advisories they are bound to follow. But here is the operative part: Although the SRO committee can recommend for minor penalties, “we generally escalate the matter to the regulator for any action for any noncompliance. SRO is more of a friend, philosopher and guide rather than a ruthless executor.”

The SRO turf is set to get interesting.