With the Reserve Bank of India (RBI) opening the door for multiple self-regulatory organisations (SROs), various entities are gearing up to seek approval for an SRO license within the fintech sector. This move marks a significant step towards self-governance in the industry, aiming to enhance standards and best practices through collective efforts.
Industry Players Eyeing SRO Status
Several prominent fintech associations are keen to acquire the SRO tag. The Payments Council of India (PCI), the Digital Lenders Association of India (DLAI), and the Fintech Association of Consumer Empowerment (FACE) are all in the race. Vishwas Patel, joint managing director of Infibeam Avenues and Chairman of PCI, stated, “PCI shall apply for the SRO under a new non-profit entity as envisaged by RBI as we strongly believe that by pivoting towards a culture of self-governance, all our members will proactively set and adhere to industry standards and best practices.”
Apart from PCI, other associations like DLAI and FACE are also considering their options. A spokesperson from the peer-to-peer (P2P) Association of India mentioned, “We are currently discussing various aspects on the guidelines and whether we need to seek an SRO status.”
Framework for Self-Regulatory Organisations
The RBI released the much-anticipated framework for SROs in the fintech sector, outlining that any representative organisation for fintechs can apply for recognition as an SRO. The applicants should have a broad membership base across entities of various sizes, stages, and activities. The framework aims to ensure that the SROs’ policies and regulations benefit the entire fintech ecosystem rather than favoring specific segments.
To address concerns about a single SRO structure, the RBI clarified that the number of SROs to be recognized would depend on the number and nature of applications received. However, entities must meet a minimum net worth of Rs 2 crore within a year of being recognized as an SRO. This requirement may pose a challenge for smaller entities.
Challenges and Concerns
Maintaining the required net worth involves substantial financial resources, which could be a significant hurdle for smaller SROs. Nikhil Varma, managing partner at MVAC Advocates & Consultants, noted, “Maintaining such a net worth involves substantial financial resources, which smaller SROs might struggle to accumulate. This difficulty in attracting investors or funding is especially pronounced in niche or less lucrative industries.”
Moreover, the high financial threshold might exclude knowledgeable individuals or groups without the financial means, thus limiting diversity and inclusivity within SROs. SKV Law Offices Partner Shryeshth Sharma echoed this concern, suggesting that the financial requirement might result in a less diverse representation within the SRO ecosystem, potentially skewing membership towards larger and more established firms.
Another challenge lies in the RBI’s requirement that an SRO must represent the fintech sector with a broad membership across various sizes and activities. This could disqualify SROs focused solely on specific subsectors like lending or payments. “This inclusivity requirement could disadvantage specialised SROs that have deep expertise and strong relationships within their niche areas, potentially excluding them from the opportunity to be recognized as an SRO under the current framework,” said Vatsal Gaur, partner at King Stubb & Kasiva, Advocates and Attorneys.
Broad Representation and Inclusivity
FACE, DLAI, Fintech Convergence Council (FCC), Payments Council of India, and the P2P Association of India represent different facets of the fintech ecosystem. Each organization has a specific focus, whether it be consumer-facing lenders, micro-small and medium-sized enterprise lenders, software-as-a-service companies, or payment aggregators.
The central bank’s representation mandate ensures that an SRO’s policies and regulations are inclusive and beneficial to the entire fintech ecosystem. However, this inclusivity requirement could put specialized SROs at a disadvantage. The RBI’s objective seems to be to limit the number of recognized SROs and ensure that those in operation are stable and well-resourced. “The RBI’s objective seems to be to limit the number of recognized SROs that are in operation; and ensure that recognized SROs are stable and have the resources to fulfill their responsibilities,” said Yajas Setlur, partner at JSA Advocates and Solicitors.
Also read: Payment Aggregator Milestone: CRED’s New Chapter in Fintech
Operational Challenges and Regulatory Oversight
While the framework aims to create a self-regulatory environment, the RBI retains significant oversight powers, including the ability to audit and revoke recognition if necessary. This duality can create tension between the SRO’s autonomy and the RBI’s regulatory control, potentially leading to conflicts and operational challenges.
SROs are also required to establish and maintain robust IT infrastructure, surveillance mechanisms, and a grievance redressal framework. These requirements can be particularly challenging for smaller entities. Despite these hurdles, many SROs are expected to adapt to the regulations and diversify their membership and activities.
Conclusion
The RBI’s framework for multiple SROs in the fintech sector represents a pivotal step towards self-regulation and enhanced industry standards. While the move is welcomed by many, it also brings to light several challenges, particularly for smaller entities striving to meet the stringent requirements. As the industry navigates these changes, the focus will remain on fostering a culture of self-governance, inclusivity, and stability to drive the fintech ecosystem forward.
