RBI Releases Draft Framework For Self-Regulatory Organisations

The Reserve Bank of India released the draft framework for self-regulatory organisations on Thursday, with the aim of improving regulatory compliance for all regulated entities, irrespective of the sector they cater to.

Self-regulatory organisations, or SROs, help foster innovation, transparency, fair competition, and consumer protection, the RBI said in a release. "In sum, self-regulation shall complement the extant regulatory/statutory framework for better compliance, in letter and spirit."

This comes with the need to develop better industry standards for self-regulation with the growth of the regulated entities in terms of number as well as scale of operations, the RBI said.

In September, NDTV Profit reported that the RBI is working on building the first self-regulatory organisation for the Indian fintech industry.

SROs are expected to act as a bridge between the regulated entities and the central bank. "The SRO is expected to be an ally of the Reserve Bank in ensuring better compliance with the regulatory guidelines, development of the sector, protection of stakeholder interests, foster innovation and detection of early warning signals," the central bank said.

Following are some of the responsibilities of the SRO towards the RBI:

• The SRO shall inform the RBI of the developments in the sector on a regular basis, along with any regulatory violations.

• The SRO should submit its annual report to the RBI within three months of the completion of the accounting year, along with periodic returns.

• RBI will inspect the books of the SRO or arrange to have the books inspected by an audit firm.

The central bank has listed the following eligibility criteria for entities intending to function as SROs:

• The applicant shall be set up as a not-for-profit company registered under Section 8 of the Companies Act, 2013. The applicant must have adequate net worth and should be able to create the infrastructure required to operate as an SRO.

• The applicant must represent the sector and have the specified membership, or should have submitted roadmap for attaining specified membership within a reasonable timeline.

• The applicant and its directors must have professional competence, be financially sound and have a general reputation for fairness and integrity to be established to the satisfaction of the Reserve Bank.

• While granting recognition as an SRO, the Reserve Bank may, if deemed necessary, prescribe such other conditions as may be necessary to ensure that the functioning of the SRO is not prejudicial to the public interest.

The regulator may reject any application that is incomplete or does not fulfil the requisite criteria. However, before rejecting any such application, the central bank will give the applicant a chance to address such objections within 15 days from the date of receipt of intimation from the RBI.

If the applicant is deemed suitable, the central bank would issue a letter of recognition as the SRO, the central bank said.

The RBI reserves the right to not grant recognition to any SRO, and the decision will be final.

Sugandh Saxena, chief executive of Fintech Association for Consumer Empowerment, said that the draft framework was encouraging and it will contribute to better policy outcomes.

"It clarifies to REs and aspiring SROs the regulatory expectations on governance, activities, resources, expertise, innovation, customer protection and individual and collective duties for effective self-regulation," she said.

"In a fast-evolving and innovating digital lending industry, such a framework becomes even more critical to keep a pulse on emerging trends for response."

Jatinder Handoo, chief executive officer of the Digital Lenders Association of India, also welcomed the move and called it balanced.

"The governance, transparency, and competency of an SRO, its financial sustainability, stability and the ability to enforce the code of conduct ultimately represent the industry's voice. The draft has clearly laid down the characteristics of an SRO, its responsibilities towards RBI and its members, etc.," he said.