Developing best practices – SRO for fintechs will be a first step

Source: The post is based on the article “Developing best practices – SRO for fintechs will be a first step” published in Business Standard on 11^th September 2023.

Syllabus: GS 3 – Indian Economy – Banking Sector

Relevance: About regulating fintech

News: The RBI has suggested fintech to establish a self-regulatory organization (SRO), which is a step in the right direction.

What are fintech?

Fintech plays a vital role in offering convenient access to formal financial services, benefiting lower-income individuals.

The fintech sector encompasses various digital-based financial services such as payments, UPI-based transfers, digital wallets, and small, short-term loans, effectively replacing traditional moneylenders.

Fintech assesses borrowers’ creditworthiness using transaction data and collaborates with traditional financial institutions like NBFCS and banks.

They have maintained reasonable default rates while generating significant revenue by serving the low-income segment.

However, to maintain ethical and regulatory standards, fintech practices and processes need to align with established norms.

Why is it necessary to regulate fintech?

Fintech can charge excessively high interest rates, especially to borrowers with limited access to formal credit, which could lead to defaults. Mis-selling of loans is another concern due to incentive structures.

Therefore, looking at potential concerns, the RBI has established a basic framework for a self-regulatory organization (SRO) and encouraged fintech to regulate themselves. However, if necessary, stricter regulations can be imposed later. 

Currently, an SRO offers the innovative fintech industry an opportunity to shape its own best practices.

Read More: Regulation of Fintech in India – Explained and Why the RBI has proposed setting-up a Self Regulatory Organisation for fintech