RBI-regulated entities interface set for a change with bigger role for SROs

An omnibus framework for self-regulatory organisations (SRO), sector-agnostic at that, is in the works. “SROs can play an important role in strengthening the compliance culture among their members and also provide a consultative platform for policy making,” said Reserve Bank of India (RBI) governor Shaktikanta Das. Paragraph 28 of the October 6 Monetary Policy Statement is significant – it breathes life into Finance Minister Nirmala Sitharaman’s statement in the Annual Budget for FY23 that financial regulators would be requested “to carry out a comprehensive review of existing regulations so as to simplify, ease and reduce cost of compliance.”

The financial topography has undergone a tectonic shift over the past three decades: Other than banks and non-banking financial companies (NBFCs) — what may be termed as legacy regulated entities (REs) — you now have small finance banks, payment banks, microfinance institutions (MFIs) and fintechs. And these REs also intersect with firms which originate business for them, and reside relatively low on Mint Road’s oversight hierarchy. This even as the former hold hands – say like co-lending between banks and NBFCs. Finding common issues and working in step to solve them has become tougher.

In search of binding ties

NBFCs don’t have an SRO even as data from the RBI’s report on Trend and Progress of Banking in India shows that at the systemic level their share of outstanding credit stood at 21.3 per cent or 1.3 per cent of gross domestic product (GDP). Sure, you have the Finance Industry Development Council (FIDC) set up in 2004, but then, it can’t lay claim to represent the industry in its entirety.

A top NBFC official points to the multiplicity of categories with no coherence in either their activities or regulation. “At times, within the same corporate group, you have NBFCs focused at different products and customer segments — plus a core investment company.” 

Business Standard has learnt that Mint Road has informally conveyed to NBFCs that they set up an SRO. And FIDC is on the cusp of a change: “We want to be broad-based and become an SRO. We are awaiting the RBI’s framework for this,” says Umesh Revankar, chairman of FIDC who also serves as the executive vice-chairman of Shriram Finance.

The plot can get even more complicated when it comes to fintechs.

Take the definition: What is fintech? The Financial Stability Board (FSB) – it monitors and makes recommendations about the global financial system – has defined it as “technologically enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services”. The ‘Report of the Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps’ (November 18, 2021) notes that “taking cognisance of the lack of a universally acceptable comprehensive definition of 'fintech credit’ or ‘digital lending’, this report has not attempted to define this term, as new models and approaches are still evolving.”

In the case of fintechs, the stakes are mounting by the day.

According to the Boston Consulting Group, global fintech annual revenues are at $245 billion – a mere 2 per cent of global financial services revenue – are estimated to reach $1.5 trillion by 2030. The Indian fintech industry is projected to generate around $200 billion in revenue by 2030; and by then, it could potentially contribute to 13 per cent of global fintech revenues.

The Fintech Association for Consumer Empowerment has approached the RBI to get an SRO licence; so too has the Digital Lenders’ Association of India. And there have been whispers that the Indian Banks' Association (IBA) and the Payment Council of India (PCI) are to jointly set up an SRO for digital payments. And this is a sector where just about every other financial vertical has been re-imagined.

Are we to have an SRO for each of them?

“I don’t know whether this will lead to a proliferation in SROs. What’s important to note is that the financial world has several new entities; some directly regulated and some which are not,” says Naveen Surya, chairman of Fintech Convergence Council. “And they are all interconnected. How you slice and dice from here on will be interesting. The situation is an evolving one,” he adds.

Regulate that
 

• Budget FY23 said that financial regulators would be requested “to carry out a comprehensive review of existing regulations so as to simplify, ease and reduce cost of compliance.”
   
• RBI’s move to come out with an omnibus framework for self-regulatory organisations (SRO), sector-agnostic at that, builds on the FY23 Budget announcement
   
• The involvement of market experts could increase regulatory effectiveness. SROs are likely to have closer informal and formal contacts in the industry and have their ears to the ground
   
• SROs can facilitate proactive, agile, and flexible responses to changing financial conditions

Effective regulations 

More than one SRO for every sector may well be the norm, it appears. MFIs have two SROs: Microfinance Institutions Network and Sa-Dhan. That leads us to the question: What of coordination among SROs? “The regulator of the sector concerned should coordinate all SROs in that space. That way, effective regulation will be possible,” says Jiji Mammen, executive director and chief executive off­ic­er of Sa-Dhan. But then: Is there also to be a mirror image of the Fina­ncial Stability and Development Council set up in December 2010 – the coordinating agency for regula­tors – chaired by the finance minister?

Just how critical Mint Road views SROs can be gauged from deputy governor M Rajeshwar Rao speech in Cairo (March 5, 2023). Speaking at the 17th Annual Conference of the Foreign Exchange Dealers Association of India (Fedai) – the country’s first ever SRO – Rao held that the primary motivation is to enhance effectiveness in regulations by drawing upon the depth of technical expertise of practitioners. The involvement of market experts could also enhance effectiveness in regulations by highlighting various technical and practical aspects, nuances and trade-offs involved in regulatory policy. SROs are also likely to have closer informal and formal contacts in the industry and have their ears to the ground. They can, therefore, facilitate more proactive, agile, and flexible responses to changing financial conditions.

But Rao held forth on vested interests as well. SROs largely comprise industry members and are, hence, subject to conflicts of interest arising between the latter’s own commercial interests and the former’s expected public role. “Such conflicts can lead to weakening of the regulatory structure, and potentially harm the interests of the customers/investors. SROs could also find it hard to prevent collusive behaviour leading to inefficiencies and dissatisfaction among consumers,” he says. What’s unsaid is that the dividing line between SROs and lobby groups is a very fine one!

And lastly, another elephant in the room — an SRO for banks.  

For the IBA is not an SRO: It’s only a lobby group. The RBI had first asked IBA to weigh the idea of becoming an SRO way back in 1998, a development which Business Standard reported on September 21, 1998. A quarter century on, we are very much in the same place even as Mint Road has said that fintechs should set up an SRO. 

The SRO story has just begun to unfold.

 

With inputs from Abhijit Lele