Syllabus: GS3/ Economy
Context
- The Reserve Bank of India (RBI) has officially recognised the Finance Industry Development Council (FIDC) as the Self-Regulatory Organisation (SRO) for the non-banking financial company (NBFC) sector.
What are Self‑Regulatory Organisations (SROs)?
- The RBI’s Omnibus Framework describes an SRO as a non‑governmental organisation that is authorised by a regulator to regulate and oversee a particular industry or sector.
- SROs derive authority from membership agreements and operate within the boundaries defined by law.
- Eligibility: The RBI’s guidelines require an SRO to be a Section 8 not‑for‑profit company, have diversified shareholding (no entity may hold more than 10 % of capital) and maintain sufficient net worth.
- SRO Responsibilities:
- Draft and enforce a code of conduct covering governance, risk management, responsible lending, and customer protection.
- Monitor compliance, undertake surveillance, and address misconduct swiftly.
- Establish grievance redressal and dispute-resolution mechanisms.
- Educate borrowers about lending terms, financial literacy, and conduct staff training programs.
- Early‑warning signals: By being close to the industry, SROs can alert regulators to emerging risks or misconduct.
| Non-Banking Financial Corporation (NBFCs)? – NBFCs are companies registered under the Companies Act, 1956, engaged in financial activities such as; 1. Offering loans and advances, 2. Acquiring shares, stocks, bonds, debentures, or other marketable securities, 3. Operating deposit schemes in various formats. – It does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. |
Need for an SRO in the NBFC Sector
- Rapid Growth and Sectoral Importance: NBFCs contribute nearly one-third of total lending in India and serve underserved segments like MSMEs, housing, vehicle finance, and micro-enterprises.
- Their growing role demanded a structured mechanism to enforce discipline, standard practices, and accountability.
- Pressure on RBI: RBI directly supervises thousands of NBFCs, creating a huge regulatory burden.
- An SRO acts as an extended arm of the regulator, easing oversight while ensuring compliance.
- Sector-Specific Challenges:
- Crises and liquidity issues: IL&FS default (2018) and other asset-liability mismatches highlighted systemic vulnerabilities.
- Governance gaps: Weak corporate governance, poor risk management, and opaque ownership structures in some NBFCs.
- Shadow banking risks: NBFCs perform bank-like functions without being banks, posing contagion risks.
- Heterogeneity: Diverse operations across housing, vehicle loans, gold loans, micro-lending, and infrastructure finance complicate regulatory monitoring.
Way Ahead
- Comprehensive code of conduct: The code should cover governance, risk management, responsible lending, transparency, fair debt collection, cyber‑security, data privacy and ESG considerations.
- Set up dedicated committees for compliance monitoring, audits and consumer complaints.
- Promote financial literacy: Develop consumer‑education campaigns explaining NBFC products, interest rates, repayment terms and dispute resolution.
Source: BS
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