RBI’s new regulatory framework relies on significant self-policing

Source: The post RBI’s New Approach to Regulation has been created, based on the article “RBI’s new regulatory framework relies on significant self-policing” published in “Live mints” on 15th January 2024.

UPSC Syllabus Topic: GS paper3- Economy – mobilisation of resources, growth, development and employment.

News: The article discusses how the Reserve Bank of India (RBI) is shifting towards a new regulatory framework. It focuses on self-regulation within banks and financial institutions and promoting self-regulatory organizations (SROs) for different financial sectors to manage risks better and reduce regulatory burdens.

What is RBI’s New Approach to Regulation?

Encouraging Direct Communication: RBI Governor Shaktikanta Das has initiated one-on-one discussions with bank CEOs, enabling RBI to quickly identify industry trends and inform its regulatory actions.

Promoting Self-Regulation: RBI aims to foster self-regulation at two levels: within individual entities and across the industry. The idea is that banks and financial groups, having more information, can take timely and effective action to manage risks.

Developing Self-Regulatory Organizations (SROs): RBI is working on a framework for recognizing SROs in different financial sectors, like banking and fintech, to manage industry-specific regulations and standards.

What are Self-Regulatory Organizations (SROs)?

SRO is a non-governmental organization that sets and enforces rules and standards relating to the conduct of entities in the industry (members) to protect the customer and promote ethics, equality and professionalism.

Gaps in the Current SRO Framework:

1. Ineffectiveness of IBA: The Indian Banks’ Association (IBA), though considered an SRO, lacks effectiveness, particularly seen as biased towards public sector banks and less representative of private and foreign banks.
2. Multiple SROs in Fintech: The fintech sector faces the challenge of having multiple SROs, like the Digital Lending Association of India and the Fintech Association for Consumer Empowerment, leading to regulatory arbitrage and compliance inconsistencies.

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What challenges exist in the Banking sector?

Governance in Public Sector Banks: There’s a governance gap due to the government’s role in appointing senior management and board members, leading to divided loyalty and less incentive to improve governance structures.

Imbalanced Incentive Structure: In many banks, there is a disproportionate emphasis on marketing and business development, overshadowing crucial assurance functions like risk management and internal audits.

What should be done?

Enhance IBA’s Role: Strengthen the Indian Banks’ Association to make it an effective SRO, ensuring fair representation and effectiveness for both public and private sector banks.

Consolidate Fintech SROs: Address the issue of multiple SROs in the fintech sector by establishing a unified framework, possibly merging existing organizations to avoid regulatory arbitrage and ensure consistent compliance standards.

Refine the SRO Framework: RBI should revise its draft framework to integrate all financial sectors’ SROs effectively, covering both existing and emerging organizations, to ensure comprehensive oversight and regulation.

Question for practice:

How is the Reserve Bank of India (RBI) changing its regulatory approach, and what challenges is it addressing in the banking sector?