DLAI, FACE rally for fintech self-regulation amid regulatory scrutiny

The impetus by industry bodies comes at a time when a section of the fintech industry believes the regulator is against the development of the sector.  (Amit Dave/Reuters)
The impetus by industry bodies comes at a time when a section of the fintech industry believes the regulator is against the development of the sector. (Amit Dave/Reuters)

Summary

  • The self-regulatory organizations, with 120 members, seek better enforcement through RBI's draft guidelines.

Mumbai: Self-regulation will go a long way in avoiding conflicts with the Reserve Bank of India, and foster trust between the regulator and fintech firms, said experts, amid escalating tensions between the central bank and certain industry stakeholders, sparked by RBI's actions against Paytm Payments Bank. 

There's also a growing perception within the fintech industry of regulatory obstacles impeding sectoral growth.

Some fintech firms also put their support on record by writing to the finance minister and RBI governor after the central bank barred Paytm Payments Bank from accepting deposits.

While both self-regulatory organizations (SROs)—Digital Lenders Association of India (DLAI) and Fintech Association for Consumer Empowerment (FACE)—collectively representing around 120 fintech firms, do not have enforcement powers, they are of the opinion that the draft guidelines released by RBI on 15 January could help them enforce decisions among member firms. 

To clear the air, RBI governor Shaktikanta Das, in a media interaction, said that the central bank's actions were against a regulated entity (Paytm Payments Bank) and not against any fintech. 

Shiv Chatterjee, co-founder, DMI Finance, a non-banking financial company, and an executive committee member of DLAI, believes RBI is apprehensive about trusting digital lenders to act responsibly, considering that there have been numerous instances where, knowingly or unknowingly, entities have clearly flouted norms.

“DLAI has tried, not always successfully, to highlight such instances, whenever it sees emerging practices that look antithetical to the regulations," he added.

The core businesses of DMI Finance, which acquired lending fintech ZestMoney in January, is corporate lending, housing finance, digital consumer and small business finance. 

The challenge, however, is to enforce action against serial violators, said experts. In fact, on 15 January, RBI said fintechs were reshaping the landscape of financial services, but they must ensure a balance between facilitating innovation and meeting regulations, to protect consumers. 

Self-regulation within the fintech sector, RBI said, is a preferred approach for achieving the desired balance. 

Despite lacking enforcement powers, DLAI maintains a code of conduct, and is trying to standardise the norms, while considering RBI's suggestions. Chatterjee hopes that RBI will approve the SRO initiative in the early part of the next financial year. 

“For the SRO, we are hoping that enforcement powers are not limited to just naming the entities that are non-compliant. It would be more effective if it has a more constructive role in shaping the sector, and inculcating compliance as a cornerstone of good behaviour," Chatterjee said

RBI has also been urging fintechs to look seriously at self-regulation. Calling it a “critical issue", Das said in September that fintechs “need to evolve industry best practices, privacy and data protection norms in sync with the laws of the land, set standards to avoid mis-selling, promote ethical business practices, and transparency of pricing". “I would like to use this opportunity to urge and encourage fintechs to establish an SRO themselves." 

In fact, according to experts, the RBI draft guidelines explicitly state the importance of SROs for fostering the development of the fintech ecosystem.

“We were formed like an SRO for fintech lending and are working like one. Regulatory recognition is vital to legitimacy, credibility and enforcement. SRO recognition will incentivise membership to cooperate with information sharing and align with self-regulatory norms," said Sugandh Saxena, chief executive officer, FACE.

FACE has an oversight mechanism for its members, comprising 80% of digital lending business volumes, according to its website. The organization utilizes members' loan apps, websites, and social media platforms to pinpoint deficiencies in customer protection norms, such as consent, disclosures and complaint resolution.

“We encourage members to report unhealthy or non-compliant practices in the market or competition, and we independently verify the evidence. We also use customer complaint data, actual complaints, and surveys to understand customer challenges and act on industry-level customer issues," said Saxena.

In the third quarter of FY24, 37 fintech members of FACE had disbursed loans of 35,999 crore through non-banking entities, or in collaboration with other lenders, up significantly from 23,141 crore a year ago.

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