RBI Proposes Draft Framework for Self-Regulatory Organisations (SROs) in Banking and NBFCs

The Reserve Bank of India (RBI) has released a preliminary framework for self-regulatory organizations (SROs) aimed at overseeing banks, non-banking financial companies (NBFCs), and other entities under its regulatory purview. Seeking public input until January 25, 2024, the draft outlines eligibility criteria and operational guidelines for potential SROs.

Eligibility Criteria

To qualify for an SRO license, applicants must establish a not-for-profit company possessing sufficient net worth and infrastructure capabilities for ongoing responsibilities. Applicants must represent their respective sectors and demonstrate specified membership or provide a roadmap for achieving it within a reasonable timeframe. Clean legal records, both for the applicant and its directors, are imperative, with adherence to fit and proper criteria in all aspects.

Regulatory Oversight and Management

RBI mandates that SROs be professionally managed, emphasizing the need for suitable provisions in their Articles of Association (AoA). Board directors must continuously meet fit and proper criteria, and a minimum of one-third of board members, including the chairperson, should be independent without active associations with the relevant regulated entities.

Reporting and Governance

SROs are obligated to promptly report any changes in directorship or adverse information about directors to the RBI. The central bank retains the authority to revoke SRO recognition if its functioning is deemed detrimental to public interest. SROs must keep the RBI informed about sector developments and promptly report any violations by their members. Additionally, SROs are tasked with executing assignments from the RBI and providing requested data periodically.

Industry Initiatives

The move aligns with RBI Governor Shaktikanta Das’s September suggestion for fintech firms to establish an industry SRO. Existing initiatives by groups like the Digital Lenders Association of India (DLAI) and the Fintech Association for Consumer Empowerment (FACE) reflect an industry-wide commitment to self-regulation.

Questions Related to Exams

Q: What is the purpose of RBI’s draft omnibus framework for SROs?

A: The framework aims to establish self-regulatory organizations (SROs) for enhanced oversight of banks, NBFCs, and entities under RBI regulation.

Q: What are the eligibility criteria for obtaining an SRO license?

A: Applicants must set up a not-for-profit company with adequate net worth, infrastructure, and sector representation. Clean legal records and adherence to fit and proper criteria are essential.

Q: How should SROs be managed according to the draft framework?

A: SROs must be professionally managed with independent directors, and changes in directorship or adverse information must be promptly reported to RBI.

Q: What role do industry associations play in self-regulation?

A: Industry associations, like DLAI and FACE, demonstrate a collaborative commitment to self-regulation, aligning with RBI’s push for enhanced oversight in the financial sector.