Finance lobby groups will need to make cultural shift as they become SROs

Last week Sa-dhan — the self-regulatory organisation (SRO) for microfinance companies — released a manual on customer redress based on global best practices. Set up in 1999 as a trade and policy advocacy body, it got the status of an SRO from Mint Road a decade ago. “There’s equal role for the development of the sector and strengthening institutions,” says Jiji Mammen, Sa-dhan’s executive director and chief executive officer (CEO). Two committees — on enforcement and grievance redress — guide Sa-dhan in ensuring responsible lending and dispute resolution among members.

 

The Fintech Association for Consumer Empowerment (FACE) was waved in as an SRO last year. Its CEO, Sugandh Saxena, is “broadening the scope of app-monitoring beyond loan apps… fraudulent apps continually find new ways to deceive customers, and promptly removing them is crucial for maintaining trust in digital financial services”. FACE has standards and oversight, and enforcement committees: They function within the parameters of a board-approved policy. Then you have the Business Correspondent Forum of India (BCFI); it is to partner with the India Fintech Forum to co-create a stronger SRO. For industry support, it has teamed up with the Internet and Mobile Association of India and formed a chapter with their help: IAMAI-BCFI. “Both as an SRO and industry body, we are gearing up for data dissemination; it may give deeper insights to aggregate and share the data,” says Anand Kumar Bajaj, founder-managing director and CEO, PayNearby.

 

Heavy lifting begins

 

A tad over two years after Reserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao flagged the need for an SRO architecture, the building blocks are coming into view. There are multiple SROs: FACE and the Fixed Income, Money Market, and Derivatives Association of India being newbies sharing space with legacy Sa-dhan, MicroFinance Institutions Network, and the Foreign Exchange Dealers' Association of India (Fedai). In the queue are the Finance Industry Development Council (FIDC), Unified Fintech Forum (which is the rebranded Digital Lenders Association of India), National Urban Cooperative Finance & Development Corporation, and an SRO for business correspondents.

 

A critical aspect has to be watched for. As Rao put it, “SROs must display their willingness and ability to address concerns beyond the interest of their membership…they must remain neutral and be seen to maintain objectivity” (March 9, 2023). The ‘Omnibus Framework for recognition of SROs for REs’ (March 21, 2024) is categorical: They are expected to be an ally of the RBI and act as a bridge. Their workload can be evident from the RBI’s regulatory and supervisory menu (See box: Key RBI agenda for FY26) as spelt out in its annual report. 

 

The transition from being a trade body to an SRO will be tough; think of an SRO as a board for a sector.

 

“It’s a significant cultural shift for trade bodies to become SROs. While in their erstwhile role, members’ interest took primacy, as SROs, public interest has to become one of their primary objectives,” notes Rohan Lakhaiyar, partner, Grant Thornton Bharat. Along with structural governance independence, SROs will have to demonstrate behavioural transparency to avoid regulatory capture of the forum by a few large players. “The rules of engagement with members need to become broad based, highly consultative, with open communication for updates and disclosures, and decision making to be made through competent and independent committees.”

 

Newly minted SROs will find this journey tough. Even in the case of Fedai (the oldest SRO, having been set up in 1958), fair pricing in the business is an issue. Rao noted that customers, especially small and medium businesses and retail segments, had approached Mint Road expressing concerns about the high charges. “While large corporates are able to enjoy the benefits of tighter pricing warranted by the liquidity in our markets, charges recovered from smaller customers do not appear to be justified by higher cost of processing/warehousing small-ticket transactions.”

 

In the case of non-banking financial companies (NBFCs), RBI Deputy Governor Swaminathan J has pointed out that they have the lowest average number of compliance staff relative to their size compared to other sectors like commercial and cooperative banks. He noted that despite regulatory measures aimed at ensuring the autonomy of these functions, “it is disheartening to encounter instances where heads of assurance functions are given junior positions within the hierarchy or there is lack of direct access to the board.” Instances of dual-hatting with other roles are also observed. FIDC, as an SRO, has its task cut out to sensitise members on these matters. (Mind that speeches by the RBI’s brass are a signalling mechanism!) 

 

Too many regulators?

 

A related concern is what if other financial sector regulators were also to latch on to the SRO idea? How does coordination happen between them in the case of financial conglomerates?

 

“A conglomerate is anyway exposed to several different regulators. You will want to ensure that you take the best out of that by saying that if one regulator has told me something, the industry is moving towards that” is how Anish Mashruwala, partner, JSA Advocates and Solicitors (and co-chair of the finance practice and head of its banking and finance group) views it. He fleshes it out: The idea of the SRO is not to make it more regulatory; it's about more decentralisation to allow a larger sense of how a particular product in the industry should develop. “So, if you are a conglomerate with different businesses…you are going to have those independent businesses anyway subject to different regulators. And your particular entity in that conglomerate, which is overseen by a particular regulator, will effectively take best practices, which the industry as a whole, in the SRO, will lobby for.”

 

It raises the question: What of coordination between SROs? Is there to be a mirror image of the Financial Stability and Development Council (FSDC) set up in December 2010 — the coordinating agency for regulators — chaired by the finance minister. More so — unrelated as it may appear — given the move in Union Budget FY25 to set up a mechanism to evaluate impact of current financial regulations and subsidiary instructions under the FSDC; it is also to formulate a framework to enhance their responsiveness and development of the financial sector.

 

On RBI’s agenda for FY26  Department of Supervision

 

• Review and issue of updated/harmonised regulatory instructions on statutory and concurrent audits in regulated entities (REs)
• Conducting detailed thematic reviews in select areas of cyber risks
• Enhancing cyber resilience and capabilities by implementing recommendations of the inter-regulatory working group on uniformity in baseline cybersecurity guidelines of financial entities
• Enhancing cyber-mapping of financial systems and conducting cross-sectoral and marketwide cyber crisis simulation exercises in a phased manner
• Enhancing the existing framework for supervision of non-banking financial companies (NBFCs) in the base layer
• Assessing adherence by REs to pricing guidelines prescribed vide extant regulations to ensure customers are not charged exorbitant interest rates
• Examining the migration of NBFCs to risk-based supervision

 

Department of Regulation

 

• Issuance of harmonised regulations on ‘Income Recognition, Asset Classification and Provisioning Pertaining to Advances’ to REs
• Issuing prudential guidelines on climate risk for banks. These include issuance of final guidelines on disclosure of climate-related financial risks and guidance on climate-scenario analysis and stress-testing
• Operationalisation of the data repository, Reserve Bank-Climate Risk Information System Enforcement Department
• Review standard operating procedure for enforcement action based on the experience gained

 

Source: RBI Annual report FY25