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Fintech associations exploring ways to incentivise SRO membership

Mumbai, Jan 23, 2024 

The central bank in its draft framework had said that the industry needs to answer the question of how an SRO-FT would create incentives for membership since entities in the fintech sector 

To incentivise membership for a self-regulatory organisation for fintechs (SRO FT), associations in the country are exploring ways to encourage active participation among companies.

Major digital lending associations said they are addressing the challenge of encouraging membership in organisations by providing a range of resources. The Reserve Bank of India (RBI) had released a draft framework for SRO-FTs last week, outlining challenges, characteristics, and operations for such fintech organisations.

“Major incentives for companies to join an SRO-FT would include the enhancement of their mentorship especially for startups, capacity building, access to resources like innovation office, clarity on interpretation of regulatory requirements, training programmes via multiple events and webinars, legal help and being a part of unified sectoral voice at various relevant platforms,” said Jatinder Handoo, chief executive officer (CEO), Digital Lenders Association of India (DLAI).

The central bank in its draft framework had said that the industry needs to answer the question of how an SRO-FT would create incentives for membership since entities in the fintech sector are not directly regulated at present.

“Membership incentives come from value creation and, eventually, regulatory recognition. Fintechs need solidarity to navigate a fast-evolving ecosystem. It supports industry conversations and unified actions. Only as a collective can fintechs suitably shape the sector by pooling resources and standards and getting better outcomes for all,” said Sugandh Saxena, CEO, Fintech Association for Consumer Empowerment (FACE).

That said, the RBI has outlined that membership to SRO-FTs will remain voluntary in nature. In this case, associations Business Standard spoke to said stakeholders such as investors and rating agencies, among others, will persuade companies to participate in the process.

“External stakeholders like investors, rating agencies, among others will also nudge their partners to participate within an SRO framework, which will take care of the voluntary membership aspect,” said Handoo.

Saxena from FACE holds a similar view.

“Even if SRO membership remains voluntary, once SROs take roots, it will not be easy for companies to justify non-participation in SROs to their stakeholders,” she added.

Handoo added; “Those who choose not to be a member of an SRO-FT may face the risk of being swayed away from the unified sectoral voice. The SRO-FT should be seen as a piece of regulatory architecture which facilitates compliance, responsible market conduct and promotes the development function of the sector.”

Meanwhile, setting up a robust SRO-FT will be a cost-intensive process, which would include establishing necessary infrastructure, training talent, and handling the day-to-day operations of an organisation.

“Setting up an SRO-FT is a cost-intensive exercise which includes not just onboarding a highly skilled, capable SRO-secretariat, independent members on board and other board committees, but also setting up technology systems, establishing frameworks for research and development and experiments of responsible financial innovations, adequate grievance redressal and other technology functions such as compliance monitoring, surveillance, among others,” Handoo elucidated.

To fund these operations and set up infrastructure, associations said they charge a reasonable fee which is calculated on the basis of annual loan disbursement of a particular fintech company.

“For us, membership fee determination is an annual process to seek a Goldilocks balance to ensure inclusivity, representation, and financial sustainability. Fees should not come in the way of adequate representation and lead to overreliance on a few. For the current financial year, members agreed to peg it to disbursement values with a floor and cap of Rs 3 lakh and Rs 10 lakh, respectively,” Saxena said.

Similarly, Handoo from DLAI stressed that a sufficient corpus would be necessary to ensure the financial stability of the organisation.

“To ensure financial stability and sustainability of its functions, it is expected that an SRO-FT will develop through its membership an initial corpus of Rs 5 crore which would increase over a period of time to meet contingencies for unseen situations and other SRO functions,” he added.

Meanwhile, the aforementioned entities also stressed the need for a representative nature of an SRO-FT, as outlined in the RBI’s draft framework, which would ensure the inclusion of different players in the fintech ecosystem.

“Within the broad definition of fintech, companies perform myriad functions - lending, payment, data aggregation, software/IT, compliances, SaaS, scoring, and so on. It will require careful examination of the fintechs to fully understand the plurality and risks and identify a dynamic approach to deal with them while fintechs evolve,” Saxena explained.

Players suggest it is necessary to ensure the diversity of membership within organisations which would include loan service providers (LSPs) and technology service providers (TSPs).

“I think the RBI will take into consideration the diversity of membership as an important pivot of an SRO-FT, which DLAI has also been advocating for sectoral inclusiveness. There are expectations for an incumbent SRO-FT to have experience of managing consensus-based approach on critical aspects with the diverse set of entities including LSPs and TSPs which serve different needs for every segment within the fintech sector. As a part of our membership, we have a tech committee which takes tech-related aspects into consideration,” said Handoo.

[The Business Standard]

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