Welcome to MoneyRules, a fortnightly newsletter from Setu written by Atulaa Krishnamurthy and Vinay Kesari.
In this edition of the newsletter, we cover the news around the proposed RBI committee to set up a ‘light-touch’ regulatory framework for fintech intermediaries, and key announcements from SEBI in the last week of June.
RBI mulls regulatory framework for neobanking#
India may soon have an enabling framework that clarifies the roles and responsibilities of various entities when it comes to neobanking.
The longer story:
The Economic Times reported [paywall] that the RBI is planning to set up a working group to come up with a regulatory framework for neobanking, which in the Indian context usually means technology companies that partner with licensed lenders, banks, and other financial institutions without taking on licenses themselves. Key points from the report:
RBI studying classes of digital intermediaries that exist in this space, and define types of entities and their roles.
Considering a ‘light touch’ regulatory approach, with entities subject to operational guidelines, and some regulations made enforceable through the licensed financial institutions that neobanks partner with.
RBI also considering a self-regulatory organisation (SRO) for neobanking to take on an oversight role, rather than adopt a direct licensing regime.
Intention is also to ensure that non-licensed entities do not use the word ‘bank’ lightly
These developments are encouraging for a number of reasons. Other digital financial intermediaries are currently regulated in multiple ways, including through the RBI’s outsourcing guidelines, and in some cases (depending on the products and model they choose) as business correspondents, digital selling agents, etc. However, it was always unlikely that the RBI would let neobanking grow to any significant size without more specific regulation, given that neobanks play a highly customer-facing role, and one of the RBI’s key concerns is consumer protection. The recent entry of major global players such as Revolut may have accelerated this process.
Given the inevitability of regulation, this report makes the right noises given the focus on light touch regulation, de-emphasising direct licensing, and the possibility of an SRO approach to regulation.
One of the biggest challenges facing neobanks currently is setting up deep, lasting partnerships with banks. And one of the stumbling blocks to these partnerships is the lack of regulatory clarity on who can do how much, and who needs to take responsibility for which piece of service delivery. Clarity from the RBI on this could accelerate these partnerships and help them focus on product and customer experience, rather than expend energy on legal and compliance questions with no clear answers.
It’s important to remember that this is only a news report, and we will have to wait for official word from the RBI to see if a committee or working group is actually set up. It will also be interesting to see if the work of the RBI digital lending working group set up in January will be harmonised with this process, given that there will be substantial overlaps.
SEBI expands access to the corporate bond market, relaxes norms for 'accredited investors', and more#
In a press release, SEBI highlighted key decisions made at its June 2021 Board Meeting, including:
(i) Permitting companies, other than unlisted REITs and InvITs, which are less than 3 years old to issue bonds,
(ii) Introduction of a framework for a separate class of investors who can avail relaxation in regulatory norms, and
(iii) Linking skin-in-the-game investment requirements by AMCs with risk weights instead of a flat percentage or a fixed amount.
The longer story:
In news relevant to young NBFCs keen on tapping into new sources of funds, SEBI will now allow entities to raise bonds even before they turn three years old. This is provided the bonds are (a) issued on the Electronic Book Platforms of a stock exchange, (b) on a private placement basis, (c) to an institutional investor. The move acknowledges that investors in the bond market may be keen to invest in an entity for reasons other than longevity, or demonstration of a long track record. At the same time, it emphasizes informed-decision making: the release also mentions that issuers will be guided on the risk factors to be disclosed regarding the instrument.
Two key decisions by the SEBI Board that follow from developments earlier this year are (i) the creation of a new ‘well-informed’ investor class who can benefit from the relaxation of certain SEBI norms, and (ii) the calculation of an Asset Management Company’s skin-in-the-game requirements based on the risk-weights attached to its schemes.
In February this year, SEBI released a consultation paper introducing the concept of an ‘Accredited Investor’, based on the premise that sophisticated investors have the ability to tolerate higher risk, and may require lighter regulatory protection. This is an established concept in Singapore and the US, where the demarcation between retail and Accredited Investors is more distinct — for instance, only Accredited Investors can invest in early stage startups! While details on the eligibility threshold for this investor class in India is awaited, the SEBI Board approved this proposal in principle, allowing such Accredited Investors to access an expanded range of products (at reduced entry barriers, such as lower minimum investments in AIFs), and negotiate customized agreements with portfolio managers.
To align their incentives with the unit holders of the schemes they manage, AMCs have had to invest at least 1% of the new fund offer, or ₹50 lakh whichever is less, in such schemes since 2014. This investment requirement will now be commensurate with the risk associated with such mutual funds, although we will have to wait for an amendment to the Mutual Fund regulations to see the exact manner in which this will be calculated. The amendment to the skin-in-the-game requirement also comes shortly on the heels of a SEBI circular directing AMCs to pay at least 20% of the compensation of its key employees in the form of units of its schemes (to potentially avoid Franklin Templeton-esque scheme closures).
Here are a few news pieces and developments that caught our eye this past month:
Centrum Financial Services received in-principle approval from the RBI to set up a Small Finance Bank, specifically in response to its bid to acquire Punjab and Maharashtra Cooperative (PMC) Bank. The bid was made in February 2021 along with Resilient Innovations (an arm of BharatPe). This development is sure to break new ground for digital banking in India, not only because a fintech (in a first) is now armed with a small finance bank license, but also because BharatPe is keen to position the new SFB as the banking partner of choice for fintechs looking to innovate on financial products.
The Govt. rolled out the GeMSAHAY app as part of its GeM procurement marketplace, in a big step forward for the idea of embedded lending.
There appears to be some rethinking of key provisions of the draft cryptocurrency legislation that would have had the effect of banning crypto.
D91 Labs put out a great explainer on chit funds, which are a hugely popular form of credit in many parts of India.
We came across two pieces of analysis on the RBI’s CBDC proposal, one from our colleague PJ Paul, and another in Outlook.
These are all our updates for the fortnight, folks! Both of us (Atulaa and Vinay) are on twitter, so feel free to DM us with feedback and topics to include in the next edition. If you liked this, please share it with people interested in Indian fintech regulation!