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Regulatory oversight over Self Regulatory Organisations in the Fintech Sector 

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Analysis of the Draft Framework for Self Regulatory Organization(s) in the Fintech Sector

– Archisman Bhattacharjee, finserv@vinodkothari.com

Introduction

On January 15, 2023, the Reserve Bank of India (RBI) published a draft Framework titled “Draft Framework for Self-Regulatory Organisation(s) in the Fintech Sector” (‘Framework’) with the objective of eliciting feedback and gauging stakeholder expectations. In this article we analyse the said Framework which in our view is targeted more towards the unregulated FinTech sector and recommend why an SRO should opt for a recognition from the RBI.

The FinTech sector is booming and is a market disruptor as well as facilitator, based on the report published by Inc42, the estimated market opportunity in India fintech is around $2.1 Tn+ and currently there are 23 FinTech “unicorns” with combined valuation of $74 Bn+ and 34 FinTech “soonicorns” with combined valuation of $12.7Bn+. 

The main functions of the FinTech sector includes providing solutions to Regulated Entities (REs) both as outsourced information technology providers as well as acting as lending services (such as customer acquisition, KYC task, servicing, etc.). The sector, however, not being under the direct supervision of the RBI may pose significant risks toward customer protection, data privacy, cyber security, grievance handling, internal governance, financial system integrity. In this respect the introduction of the Framework  of Self-Regulatory Organisation(s) in the FinTech Sector (SRO-Ft) remains a welcome move where the SRO-FT would act as an instrument of self-regulation for the market participants, which may include both regulated and unregulated entities, by coming out with its own policies, codes of conducts etc. which are aligned with the industry standards, best practices and expectations/ recommendations of the RBI and other sector regulators. However it should be noted that due to lack of legislation, the RBI does not have have any jurisdiction over the FinTech sector (Discussed in details in Section 2 of this Article) vis-a-vis their SRO, unless the SRO’s voluntarily submit to the jurisdiction of the RBI and the same has also been envisaged under Para 3 of the directions under the head “Introduction” of the draft Framework under discussion.

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Introducing Financial Services on ONDC: Opportunities & Challenges for Digital Lenders

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– Shreshtha Barman | finserv@vinodkothari.com

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Digital Personal Data Protection Bill 2023:  Analysing the Impact on Digital Lenders

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– Subhojit Shome, Assistant Manager | subhojit@vinodkothari.com

Click here to view our: Consultancy and advisory services on Digital Personal Data Protection Act, 2023 

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Watch our Shastrartha on Digital Personal Data Protection Bill, 2023 – Analysing the impact on financial sector lender

Rise, Fall & Subsequent Legitimisation of Default Loss Guarantees

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Anita Baid & Subhojit Shome | finserv@vinodkothari.com

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Inter-operable regulatory sandbox: A playground for fintechs ?

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– Dayita Kanodia, Executive | finserv@vinodkothari.com

A regulatory sandbox allows live testing of innovative products/services under regulatory supervision and with regulatory relaxations. This in turn allows regulators to design evidence-based and innovation-friendly regulations.

An Inter-Operable Regulatory Sandbox or IoRS as defined by both RBI and SEBI is therefore a mechanism to facilitate testing of innovative hybrid financial products / services falling within the regulatory ambit of more than one financial sector regulator.

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FAQs on Default Loss Guarantee in Digital Lending

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An understanding of the Guidelines issued by RBI

Team Finserv | finserv@vinodkothari.com

On September 02, 2022, the RBI issued the “Guidelines on Digital Lending” (“DL Guidelines”), which had essentially put a bar on “Loss sharing/ structured default guarantee arrangements” such as First Loss Default Guarantees, likening their nature to that of “synthetic securitisation” as defined under the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 (“SSA Directions”). This caused a disruption in the digital lending industry as most of the arrangements ran on some form of loss-sharing arrangement. (Refer to our FAQs on the Digital Lending Guidelines here)

In its Statement on Developmental and Regulatory Policies dated June 8, 2023, the RBI announced its intention to issue a regulatory framework for permitting Default Loss Guarantee arrangements in Digital Lending[1]. The same day, the Guidelines on Default Loss Guarantee (DLG) in Digital Lending have been issued by the regulator (‘DLG Guidelines’).

We have developed a set of FAQs on the DLG Guidelines, where we intend to answer some of the critical questions relating to the default guarantee arrangements.

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Crowdfunding platforms – risks and concerns in the Indian context

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Timothy Lopes, Manager

finserv@vinodkothari.com

Introduction

Crowdfunding as a concept has been in the limelight for quite some time now. Globally there are several crowdfunding platforms that exist. These crowdfunding platforms essentially allow almost anybody to raise funds for any cause, ideas or business ventures. Interestingly, the first online crowdfunding platform was launched back in 2001[1].

However, with the advent of online crowdfunding platforms also comes the inherent risks associated with it. Through this article, the author aims to highlight the inherent risks associated with crowdfunding along with the legal permissibility and restraints in India.

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Reintroduction of the Data Protection Bill: Analysing the Implications for FinTech

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– Financial Services Division (finserv@vinodkothari.com)

Background

The Ministry of Electronics and Information Technology (MeitY) introduced the revised draft of the Digital Personal Data Protection Bill, 2022[1] (‘Bill’) on November 18, 2022 for public comments. The Bill is intended to be technology and sector-agnostic and hence, shall serve as a broad guide for digital data protection across all sectors. It is expected that sector-specific regulators shall develop regulations based on the legislation passed based on the said Bill.

In this write-up, we intend to cover the broad prescriptions of the said draft Bill and their impact on the fintech industry.

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The future of Loan-loaded Prepaid Payment Instruments

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Financial Services Division | finserv@vinodkothari.com

The latest communication from the Reserve Bank of India (‘RBI’), barring issuers of prepaid payment instruments (PPIs) from having the same loaded by credit lines, has created a substantial flutter in the financial sector, particularly among the Fintech lenders. Based on the feedback received from market participants it seems that the RBI has been trying to remove any regulatory arbitrage that a non-bank PPI issuer may have as compared to a bank. Considering the gravity of the matter even the Payment Council of India has approached the Government of India to intervene in this matter[1]. There are reports[2] that many of the issuers of PPIs have reportedly stopped issuing PPIs post receiving the RBI circular.

The trigger for all this is a June 20, 2022 communication from the RBI, addressed to certain NBFCs and Fintech lenders, who have been extending credit facilities for loading prepaid cards, stating that prepaid payment instruments (PPIs) must not be loaded through credit lines. The aforesaid communication has raised questions on the existing business model of several fintech entities and threatens their existence. The relevant extract of the said communication states that:

“A reference is invited to the provisions contained in the paragraph 7.5 of the Master Direction on PPI (PPI-MD) dated August 27, 2021 (updated as on November 12, 2021) – “PPIs shall be permitted to be loaded /reloaded by cash debit to a bank account, credit and debit cards, PPIs (as permitted from time to time) and other payment instruments issued by regulated entities in India and shall be in INR only”

The PPI-MD does not permit loading of PPIs from credit lines. Such practices, if followed, should be stopped immediately. Any non-compliance in this regard may attract penal action under provisions contained in the Payment and Settlement Systems Act, 2007”

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Financial Services firms foray into the metaverse

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Beyond Social Media & Gaming

– Subhojit Shome, Executive | finserv@vinodkothari.com

Introduction

The ‘Metaverse’ has become the latest favourite buzzword on Wall Street with players from Big Tech, Gaming, Entertainment and the FMCG Industries touting it as the best thing to happen since sliced bread.

It is now the turn of the Banking and Financial Services Industry to jump onto the bandwagon and with big ticket traditional players, like JPMorgan and PwC, buying up prime virtual real estate in the metaverse and with revenue estimations from opportunities in the metaverse being projected at $1 trillion and beyond,[1] other players (both traditional and new age) cannot help but take notice.

In this overview, we attempt to provide a bird’s eye view of what the metaverse is and the opportunities that it offers specifically to those involved in the financial services space.

The Many Definitions of the Metaverse

The term – ‘Metaverse’ – is borrowed from American writer, Neal Stephenson’s dystopian sci-fi novel – Snow Crash – wherein it is used to describe a virtual-reality based successor to the internet.[2] 

In the real world context, the term has been variously defined and used, be it by tech gurus or c-suite executives. In general it has come to imply an interactive digital world with online communities providing immersive experiences.

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