India Opens Applications For Self-Regulatory Organisations Serving NBFCs

June 24, 2024
Self-regulatory organisations that wish to represent non-bank financial companies (NBFCs) can now apply to become officially recognised by the Reserve Bank of India.

Self-regulatory organisations (SROs) that wish to represent non-bank financial companies (NBFCs) can now apply to become officially recognised by the Reserve Bank of India (RBI). 

The RBI said the SROs it envisages for the NBFC sector should represent investment and credit companies (ICCs), housing finance companies (HFCs) and non-deposit-taking institutions engaged in factoring.

Factoring is a type of debt finance whereby a business sells its accounts receivable (i.e., invoices) to third parties at a discount. It is often used in trade finance to unlock working capital and facilitate international transactions.

“The SRO may also have other categories of NBFCs as its members,” said Puneet Pancholy, chief general manager of the RBI. “However, the recognised SRO shall have a good mix of ICCs, HFCs and factors as its members.”

The RBI said it will recognise a maximum of two SROs for the NBFC sector, and that successful applicants must comply with capital requirements.

Within one year of approval or prior to launching operations, whichever is sooner, each recognised SRO must have a minimum net worth of INR20m ($240,000). After one year, this capital base must be maintained indefinitely.

Candidates must submit their applications to the RBI by September 30, 2024.

Keeping pace with fintechs

The opening of applications brings the NBFC sector up to speed with the fintech sector in the race to deliver the first RBI-recognised SRO.

Last month, as covered by Vixio, the RBI published the final version of its Framework for Recognising Self-Regulatory Organisation(s) in the Fintech Sector, alongside a call for applications.

The fintech framework proved controversial, with industry professionals divided as to whether it strikes a fair balance of power between the RBI and SRO.

Mandar Kagade, founder and principal at Black Dot Public Policy Advisors in New Delhi, provided Vixio with a list of “amber” and “red flags” that he identified within the framework.

Kagade was concerned, in particular, by several clauses that appear to give RBI the power to dismiss SRO board members arbitrarily.

He also said he expects some “back and forth” between the industry and the RBI to clarify these details before the first fintech SRO is formally recognised.

RBI sees potential in self-regulation

In October last year, in a statement on developmental and regulatory policies, the RBI said it believes that recognised SROs have the potential to strengthen the compliance culture of their members.

The central bank also said that having recognised SROs could provide a “consultative platform” that informs future policy.

In the October statement, the RBI said it would develop an “omnibus framework” for recognition of SROs that represent regulated entities.

The omnibus framework, which was published in March this year, outlined “broad parameters” to which aspiring SROs are expected to conform.

These include required objectives, functions, eligibility criteria, governance standards and application processes.

Following the publication of the omnibus framework, the RBI was authorised to prescribe further sector-specific obligations when calling for applications from SROs.

The central bank could also issue guidelines on issues such as number of SROs and number of members of each SRO.

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