In his keynote address on March 5, 2023 at the 17th Foreign Exchange Dealers’ Association of India (FEDAI) Annual Conference, M Rajeshwar Rao, Deputy Governor, RBI, spoke about Self-Regulatory Organisations (SROs) in some detail(paragraphs 9-17).

Subsequently, the Statement on Developmental and Regulatory Policies released along with the Monetary Policy Statement on October 6 announced that RBI would release an omnibus framework for recognising SROs for its Regulated Entities (REs) for stakeholder comments(paragraph 4).

On December 21, RBI issued the draft omnibus framework.

The Draft Framework (DF) expects the RBI-recognised SRO to be a “bridge” between RBI and REs on one hand and an arbiter for its members to resolve their grievances and disputes on the other. The DF’s goal is to make the financial sector more professional, compliant, innovative and ethical.

Defining SROs

Self-regulation, which is above self-interest, is in consonance with the ‘public interest’ theory of regulation. A quick review of finance literature reveals that SROs are voluntary associations of firms belonging to the same industry class which enunciate and implement rules and standards relating to the member-firms’ conduct. SROs are empowered by the government or the regulator/s to enforce self-regulation on its members.

The SRO members create a more flexible regulatory framework than the government’s or regulators’ frameworks, which benefits the industry as well as the economy at large. Self-regulation can potentially “eliminate conflicts of interest, jurisdictional conflicts, and legal limitations.”

Self-regulation in many countries predates formal regulations.

Why RBI Recognition?

Chiefly aided by techno-financial solutions, the Indian financial sector has expanded in scale and scope necessitating multiple regulations, often complex, by multiple regulators, including the global ones. Hence, the need to allow SROs to “complement” the formal regulators was felt.

Some of the prominent voluntary associations in the Indian financial sector are Indian Banks’ Association (IBA), Fixed Income Money Market and Derivatives Association of India, Association of Mutual Funds in India (AMFI), FEDAI, National Federation of Urban Cooperative Banks and Credit Societies Limited and Microfinance Institutions Network (MFIN).

These associations ensure, to various extents, their members’ compliance with regulatory standards. Some even frame policies and undertake public awareness programmes.

MFIN is the first association of the Non-Banking Finance Companies - Microfinance Institutions to obtain RBI recognition as an SRO in 2014. While Securities and Exchange Board of India set up Registrars Association of India as an SRO for registrars to an issue and share transfer agents, it asked AMFI to “act” like an SRO in May 2023.

Indian Banks’ Association

IBA was established in 1946 with 22 members. Any bank, corporation, company or society carrying on business of banking in India and governed by the Banking Regulation Act, 1949 can be an ordinary member of IBA.

As per its website, IBA has 135 ordinary members comprising 12 public sector banks (PSBs), 21 private banks, 19 payment banks, small finance banks and local area banks, 44 foreign banks operating in India and 39 co-operative banks.

Besides, it has 111 associates comprising several banking and non-banking entities. Thus, IBA covers a wide spectrum of financial sector entities. However, the banking sector is paramount in its working and functions.

Although IBA is a “premier service organization”, hitherto it is not a “public authority”, and the Right to Information (RTI) Act doesn’t apply to it.

IBA has several departments to monitor various banking activities. It also carries out wage negotiations for PSB employees.

Meeting the Conditions

The voluntary associations applying for RBI recognition as SROs and the existing SROs to whom RBI recognition will be “specifically extended” (paragraph 4) — hereinafter referred to as ‘applicants’ — have to satisfy several conditions set by the DF, of which the important ones are:

* To satisfy paragraphs 7 (iv) and 8 (iii), the applicants have to establish robust Research and Data Centres, and conduct well-researched ‘banking’ studies in order to support policy-making in the industry and also publish good journals. The banking associations in advanced economies such as Australia, Canada, Germany, UK and the US play significant roles in policy-making.

* Paragraph 8 (v) requires SROs to impart training to bankers. Therefore, the applicants should collaborate with the country’s top banking training institutions. As for “exchange of expertise and experience”, IBA had started a process long ago for the ‘specialist’ bank officers, but it was inconsequential.

* For “improving compliance culture” [paragraph 5 (iii)], the applicants should endeavour to reduce not only the compliance cost for banks but also the penalties imposed on them in case of non-compliance. For instance, during 2022-23, RBI penalised 26/33 commercial banks with a total penalty of ₹226.21 million (our computation from balance sheets).

* In order that the applicants “ensure equitable and transparent treatment for all its members” [paragraph 7 (ii)], they (a) should avoid employing superannuated and ‘on deputation’ employees of member-institutions, (b) should recruit domain specialists from the market and (c) shouldn’t involve themselves in members’ internal conflicts.

* As required in paragraph 12 (iv), the applicant should be increasingly techno-centric for building a compliance culture and promote cybersecurity in member-institutions.

Unaddressed Issues

* Whether multiple SROs in the banking sector should be allowed?

* Can an RE be a member in multiple SROs in the same industry class?

* The extent to which SROs will help members in their compliance risk management needs articulation.

* Will the proposal lead to duplication of compliance work by banks on one hand and SROs on the other?

* Risk of cartelisation by SROs must be eschewed.

* Whether SROs should liaison with the government directly or only through RBI?

* What will be the SROs’ role vis-à-vis their cross-border counterparts?

* In addition to disseminating “publicly available data” [paragraph 8 (iii)], SROs may collect primary data as well and publish research reports based thereon.

* Direct or indirect RBI inspection of SROs’ accounts may make them quasi-REs.

* Will the RTI Act apply to SROs?

The writer is a former senior economist, SBI. Views expressed are personal