The financial world asks itself: Are there too many regulators in a company?

How many self-regulatory organizations (SROs) are too many? Last week, the Reserve Bank of India (RBI) restricted the number of such entities for non-banking financial companies (NBFCs) to a “maximum of two”. To give smaller NBFCs a fair voice, it said an SRO should have at least 10 per cent of ‘core layer’ entities under the scale-based regulatory framework. In one fell swoop, Mint Road has allayed concerns about the proliferation of SROs among NBFCs, given the many types of entities involved: from housing finance entities to large deposit-taking companies.

Should this approach be extended to SROs in other parts of the financial world?

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Since the “Omnibus Framework for Recognition of SROs for RBI Regulated Entities” was published for public comment on March 21, a number of industry associations have expressed interest in becoming SROs.

In fintech, you have the Fintech Association for Consumer Empowerment and the Digital Lenders’ Association of India. Then you have the Association of Small Finance Banks of India, the Currency Cycle Association (a body for cash logistics). The business correspondent sector and the National Urban Cooperative Finance and Development Corporation (an umbrella body for urban cooperative banks) could also be in play. If each of these sectors is to have an SRO, that makes five new ones. Add to them the two existing SROs in microfinance – Microfinance Institutions Network and Sa-Dhan – and you get seven.

In what direction is the idea of SRO heading?

“I believe that the SRO framework should be better thought out. If you have multiple SROs, coordination becomes an issue, especially for financial conglomerates. There must also be a Chinese wall between the trade or business authority and the SRO. Otherwise, it becomes a lobbying group,” says M Damodaran, chairman of Excellence Enablers and former chairman of the Securities and Exchange Board of India.

Now that the RBI has reduced the number of SROs in the NBFC sector to two, there are rumors that this may apply to fintech as well. The problem is that it is even more rainbow-colored compared to traditional NBFCs. The RBI’s position is that SRO-FT (fintech) should draw strength from its membership.

It gets more interesting when you consider that traditional banks and NBFCs are going digital. Another intersection between fintech, banks and NBFCs is co-lending. The bottom line: it’s hard to put businesses into neat silos.

As he learned from a reliable source, fintech companies have informally raised the issue of the number of SRO-FTs with the banking supervision authority.

“A good solution would be to set up a task force to figure out how to do this,” says Naveen Surya, former chairman of the Fintech Convergence Council.

What if the SRO method was imitated by other financial regulators: the Pension Funds Regulatory and Development Authority or the Insurance Regulatory and Development Authority of India? Sectoral burdens and pressures will only increase. So should we have an equivalent of the Financial Stability and Development Council – chaired by the Minister of Finance to coordinate the activities of financial supervisory authorities – also for local governments?

Another controversial issue is how to resolve disputes between two SROs?

“If there is a difference of opinion between two SROs operating in the same sector, the regulator will take a final stand on the matter. Fortunately, we have not had any such situation between two SROs in our region,” says Jiji Mammen, executive director and CEO of Sa-Dhan. Again, in its circular on SRO-FT(s), the RBI has indicated that members should look to it “as the rightful arbiter of disputes”. This would require a transparent and fair mechanism for resolving disputes arising between members. By resolving conflicts and disputes of members, the SRO-FT should contribute to a stable and harmonious fintech environment. It is not clear how this will play out.

Ask Mammen about the experience of microfinance institutions and he tells you that Sa-Dhan points out irregularities or shortcomings in the sector to member institutions through guidelines that they have to comply with. But here’s the operational part: while the SRO committee can recommend lesser penalties, “we usually escalate the matter to the regulator for any non-compliance. The SRO is more of a friend, philosopher and guide than a ruthless enforcer.”

On the SRO pitch things are looking interesting.