Banker's Trust: All you want to know about SROs in finance sector

In August, the Reserve Bank of India (RBI) recognised the Fintech Association for Consumer Empowerment (FACE) as a self-regulatory organisation (SRO) in the financial technology (fintech) sector. 

The banking regulator had received three applications. Of these, one was granted the SRO status; one has been asked to reapply after meeting specific requirements, and the third is still under review.

How many RBI-approved SROs are there for banks and non-banking financial companies (NBFCs) in India?

In 1944, a group of bankers met under the chairmanship of Pranlal Devkaran Nanjee, chairman of Devkaran Nanjee Banking Company Ltd, to form an association. Two years later, on September 26, 1946, the Indian Banks’ Association (IBA) was born. This premier banking body has been crafting industry-wide wage settlements since 1966 besides serving as an interface between banks, the RBI, and the government. However, it is not an SRO. The Association of Small Finance Banks of India, a relatively recent body representing small finance banks, is also an association, not an SRO.

The Foreign Exchange Dealers’ Association of India (FEDAI), established in 1958, is probably the first SRO in this space. It was formed as an association of banks dealing in foreign exchange (authorised dealers) and is incorporated under Section 25 of the Companies Act, 1956. Its responsibilities include framing rules governing the conduct of the inter-bank foreign exchange business among banks vis-à-vis the public, and liaising with the RBI for reforms and development of the forex market.

The Forex Association of India, composed of treasury managers, foreign exchange dealers, and foreign exchange brokers, is not an SRO. Similarly, the Fixed Income Money Market and Derivatives Association of India is a voluntary market body but not an SRO.

The Finance Industry Development Council, established in 2004, represents NBFCs, particularly those involved in lending. It engages with the RBI and the government, but like others, it’s an industry body, not an SRO.

In the NBFC space, there are two SROs specifically for microfinance entities: Sa-Dhan and the Microfinance Institutions Network (MFIN). Sa-Dhan, formed in 1999 (a decade before MFIN), received SRO status in 2015, a year after MFIN.

Let’s get back to the SRO in the fintech sector. What is it expected to do?

RBI Governor Shaktikanta Das has said that through regular consultations, feedback, and policy dialogues, the SROs will facilitate open communication, helping fintechs remain informed about regulatory expectations and priorities.

In a recent interview with Business Standard, FACE Chief Executive Officer Sugandh Saxena said, “Our first priority is to get all kinds of fintechs into the SRO fold… We have 65 members currently but there is a huge universe with different business models and scales… There is a vast universe of fintechs and we would be reaching out to everyone to be a part of FACE.”

The “vast universe” of fintech holds the key to the success of any SRO in this incredibly diverse space. 

In October 2022, the RBI had issued draft guidelines for establishing SROs responsible for framing and enforcing rules for payment system operators such as card networks, card users, banks wallets, payment aggregators, ATMs, and bill payment platforms like PhonePe and BharatPe, including the Unified Payments Interface (UPI), developed by the National Payments Corporation of India.

The primary function of this SRO is to represent all stakeholders, set standards and best practices, collect data, monitor and report violations, address grievances, resolve disputes, raise customer awareness and protect them, support research and development, and finally supplement and complement existing regulatory and supervisory arrangements, besides any other activity as directed by the RBI.

Fast forward to June 2024. The RBI invited applications for SRO recognition in the NBFC sector. Applicants must achieve a minimum net worth of Rs 2 crore within one year of SRO recognition or before commencing operations. The RBI will recognise a maximum of two SROs for the NBFC sector.

The SRO for the NBFC sector is envisaged primarily for NBFCs catering to investment and credit, housing finance and factoring services. However, it may also include other NBFC categories as members, the RBI said while inviting applications. The guidelines were issued by the central bank’s Department of Regulation.

Ahead of that, in May 2024, the RBI issued guidelines for fintech SROs, specifying that they should be independent entities free from external influence and committed to upholding regulatory standards. These SROs are expected to act as repositories of information, encouraging members to comply with regulations while promoting ethical behaviour and market integrity

The key responsibilities of SROs include establishing and enforcing regulatory standards, promoting ethical conduct, resolving disputes, and fostering transparency and accountability among members. These guidelines were issued by the RBI's FinTech Department.

Their scope covers regulated fintechs, non-regulated entities such as technology service providers (TSPs), lending service providers (LSPs), neo-banks, etc., as well as account aggregators and peer-to-peer (P2P) lenders, but excludes banks and payments entities.

There are at least 10,000 regulated, unregulated and indirectly regulated entities in this space, with their market size estimated to touch $150 billion by 2025. India is the third-largest ecosystem in technology and finance after the US and China. The largest segment is payments, followed by lending and insurtech. Payments and lending, overseen by the RBI, make up roughly 80 per cent of the fintech space, though not all entities are regulated.

Fintechs are optimistic. With dedicated SROs, they will have clearer guidelines on what is permissible and what isn’t since both business models and regulations are evolving. So far so good. However, some questions remain:

# There has not been any SRO for the banking system yet. Why? If an industry body can serve the purpose, do we need an SRO at all?

# The NBFC sector is heterogeneous. An SRO in this space may potentially have the highest number of members, many of whom are regulated. Why limit the number of SROs to two?

# What about Big Tech or the most influential technology companies such as Alphabet (Google), Apple, Meta (Facebook), Amazon and Microsoft? They are also called techfins, or technology companies, which offer lending programmes, digital payments, insurance policies, wealth management tools, among others. Should they be covered by the SROs? The guidelines on fintech SROs are silent on this.

# Many entities are involved both in lending and payments; they are directly regulated for certain activities, but indirectly regulated for others. How do we cover them?

# Should the fintech SROs primarily deal with non-regulated or indirectly regulated entities such as LSPs and TSPs, among others? The fintechs are associated with lending and payments companies, and there is a lack of clarity on their roles. Cases of lenders "renting out" licences to such entities are not uncommon. Doesn't different RBI departments overseeing different parts of the same space further complicate matters?

One way of approaching this could be setting up SROs for different segments, based on the principal activities and the chain of entities involved. Also, regulated and unregulated entities could be treated differently. The key to effective implementation of the SRO regime is avoiding overlap.

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd.  

His latest book: Pandemonium: The Great Indian Banking Story  

To read his previous columns, please log on to www.bankerstrust.in   

Twitter: TamalBandyo