As the central bank seeks to accommodate roles for organizations other than traditional banks and non-banking finance firms, India’s expanding digital banking ecosystem may eventually fall under a more structured regulatory and supervisory authority (NBFCs).
The Reserve Bank of India (RBI) has formed a group to investigate the extent of various types of digital intermediates operating at the intersection of India’s technology and financial industries. Sources told that efforts are being made to offer definitions to these new organizations as well as a set of compliance standards. Fintechs that want to be lenders but don’t want to be banks, service providers integrated with banks, and API banking companies, which are referred to as “neo banks” in some Western markets, are all examples of these companies, says the industry sources.
RBI hasn’t made any response yet. Discussions are on their way but a final committee is yet to be made. However, one of the above-mentioned sources informed that senior RBI officials are mulling a “light-touch” legislative framework, in which these new firms will be subject to operating rules.
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Banking Licences were already being differentiated for different vendors by the RBI: Universal banking, payment banks, small finance banks, and NBFCs.
While the new set of regulations may be mandated for agile fintech businesses with minimal access to depositors’ cash, it is also harmonizing standards for banks and large NBFCs. “There is also a view within the central bank that either a working group or a committee to deliberate regulations is needed for these emerging segments,” a person aware of the matter said. “The consensus opinion is that the regulator should go with light-touch regulations and put the onus on banks and NBFCs dealing with such institutions to follow terms laid down by the RBI.”
The central bank has announced representatives from different industry candidates and banks to procure a consultative approach towards regulating these new entities. Many startups like Razorpay, Open, and Niyo, global neo-banks such as Revolt, and big corporations like Amazon are looking to scale their respective neo banks. As for now, these banking medians don’t have any identity of their own. They work through different modes where their rules follow the kind of their partnership.
According to another source, “the RBI is now moving toward a “Self-Regulatory Organisation” or SRO structure, in which such independent entities will bear the burden of enforcing rules.”
“Our conversation with the regulator shows that it is in favor of setting up an SRO to regulate such entities and it feels that its direct involvement in the licensing of such firms is not required.”
“There are two schools of thought on regulating neo-banks. One is the model followed in the UK and Hong Kong, where licenses for neo banks are given on fulfilling certain criteria,” a source cited above said. “The second model followed in the US, as well as in India currently, is to have licensed banks monitor these entities,” said the source. “Even for such a model, there needs to be specific definitions and scope of permissible activities, as these are consumer-facing companies that could potentially render banking intermediation functions, including account opening, merchant management, and credit disbursement for banks.”
Another reason for using such codes is to guarantee that entities do not use the word “banks” as a prefix or suffix casually. Another executive presenting the industry’s views before the RBI noted that “banks” in India are heavily regulated organizations with strict capital and legal requirements.