Post RBI guidelines, big players set to apply for fintech SROs – Banking & Finance News

With the Reserve Bank of India(RBI) leaving the door open for multiple self-regulatory organisations(SRO), several entities are looking to seek approval for ‘SRO’ license in fintech industry.

“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,” Vishwas Patel, joint managing director, Infibeam Avenues and Chairman of Payments Council of India(PCI) said.

Apart from PCI, the Digital Lenders Association of India(DLAI) and Fintech Association of Consumer Empowerment(FACE) is also vying for an SRO tag. “We are currently discussing various aspects on the guidelines and whether we need to seek an SRO status,” a spokesperson from the peer-to-peer (P2P) Association of India said.

On Thursday, the RBI in a much awaited move, released the framework for self-regulatory organisations in the fintech sector. According to the framework, any representative organisation for fintechs may apply for recognition as an SRO. The applicants should represent the fintech sector with membership across entities of all size, stage and activities.

Specifically, RBI has said that the number of SROs to be recognised would be considered on the basis of the number and nature of applications received, thereby assuaging concerns over a single SRO structure.

However, entities are supposed to meet a minimum net worth of Rs 2 crore within a year of being recognised as an SRO, which may pose a challenge for smaller entities.

“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,” Nikhil Varma, managing partner, MVAC Advocates & Consultants said.

“Moreover, the high financial threshold could exclude individuals or groups with the expertise to contribute to regulatory efforts but without the financial means, thereby limiting diversity and inclusivity within SROs,” he added.

Further SKV Law Offices Partner Shryeshth Sharma feels that the financial threshold might result in a less diverse representation within the SRO ecosystem, potentially skewing membership towards larger and more established firms.

Additionally, some experts fear that the requirement that an SRO must represent the fintech sector with membership across entities of all sizes, stages, and activities could lead to the disqualification of SROs that are focused solely on specific subsectors like lending or payments.

Broadly, FACE comprises consumer-facing lenders, DLAI comprises micro-small and medium-sized enterprise lenders, Fintech Convergence Council(FCC) represents lenders and software-as-a-service companies, Payments Council of India represents payment aggregators, and prepaid instrument issuers among others. The P2P Association of India represents peer-to-peer lenders.

The central bank’s representation mandate is designed to ensure that the SRO’s policies and regulations are inclusive and beneficial to the entire fintech ecosystem rather than favoring a particular segment. However, this inclusivity requirement could disadvantage specialised SROs, say experts.

“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​​,” Vatsal Gaur, partner, King Stubb & Kasiva, Advocates and Attorneys said.

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 a tension between the SRO’s autonomy and the RBI’s regulatory control, potentially leading to conflicts and operational challenges​, say experts.

Further, SROs are required to establish and maintain a robust information technology infrastructure, surveillance mechanisms, and a grievance redressal framework, and this can pose a challenge for smaller entities.

“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,” Yajas Setlur, partner JSA Advocates and Solicitors said, adding that many SROs will likely adapt to the regulations and diversify membership and the scope of their activities.