Hello everyone,  

Welcome to the 94th edition of The Pattern, a weekly where we unpack and discuss the latest from the world of finance, economy and technology. Let’s get started.  

Self-awareness <> Self-regulation  

Here’s my theory. FinTechs in India have a navigation problem. Be it lending tech companies or insurance or wealth startups – they all seem to know that sustainable profitability is the destination. It’s the route that’s the problem. 

While many companies challenge the bigger fish in the sea and perturb their businesses, others often attempt to carve out niches that are either overlooked or dumped by incumbents. These are the two broad routes but it's an oversimplification of the myriad ways in which FinTechs have survived and thrived in the sunrise market that’s India.  

Some had to change their product approach, some made pivots from B2C to B2B (and vice versa), while most companies regularly deal with regulatory and compliance challenges, policy uncertainty as well as competitive pressures that threaten to wipe out entire businesses and product categories.  

But it’s ultimately the navigation that has been the problem – finding alternate routes when a regulatory stop sign greets you or pacing the journey when the weather gets cloudy, and visibility reduces.  

This, the RBI and the industry hope, will get solved when the FinTech sector gets its own SRO. An SRO, true to its name, is a self-regulating body which is set up to ensure oversight of a sector that may or may not have complete legal regulation.  

Last week, RBI released the much-awaited draft framework for recognising SROs and it’s got everyone talking.  

The SRO, the RBI suggests, will be responsible for ensuring representation of FinTechs, compliance with norms, fair arbitration of disputes as well as focused on the development of the sector and maintaining the most comprehensive and updated repository of information on its constituents.  

It’s a big task. But it’s one that must be done, and the time is indeed right for the booming FinTech space to get a bit more organised and give itself the podium it much rightly deserves to deliberate and discuss the most burning issues.  

In this light, the RBI’s announcement and invitation for comments and feedback on this draft framework is a necessary step towards consolidating the fragmented landscape that is FinTech regulation.  

But can an SRO prove to be effective in a space where there are blurry lines, complex products, convoluted value propositions and an overall uncertainty on where the wind is blowing?  

It remains to be seen but there’s plenty to be excited about.  

One, SROs have proven to be effective in Indian context – be it cooperatives driven SROs or the microfinance industry SROs which have worked tirelessly to bring about positive change and order to chaotic sectors which were in disarray.  

Two, the FinTech SRO is going to meet perhaps the most stringent regulator in RBI to get recognised and that, in itself, speaks volumes about the process and procedure that shall be followed by the SRO and its constituents once it gets firmed up.  

Third, SROs are an invaluable net addition to chaotic industries where regulation and innovation are a hard tightrope to walk. The ability for the participants to collaborate and cooperate to come up with a set of ground rules is likely to be a godsend for the FinTech sector.  

However, careful monitoring of the consultation and functioning of the SROs is required. There are global examples of financial SROs being criticised for conflict of interest, lack of adequate representation, inability to fine/punish bad behaviour and becoming a mouthpiece of the policymakers without representing consumer interests enough.  

This is all for this week. As always, I am leaving some interesting data and reading recommendations below.  

Between the digits 

79% growth: Education loans by NBFCs were the fastest growing retail credit segment in the year 2023, according to RBI data . This also happens to be one of the few portfolio segments where there’s more stress than the regulator is comfortable with.  

14% good, 30% bad: SBI Chairman Dinesh Khara believes that the RBI has done the prudent thing by increasing risk weights for unsecured credit. He said that 30% growth rate is unsustainable and a 14%-15% yearly growth would be healthier for the industry.  

8,600 accounts: In a freak development, officials have frozen more than 8,000 accounts in Jharkhand on suspicion of phishing activity. At the same time, police have  arrested close to 500 people for alleged financial fraud in just the last three months.  

Reading list

1. Too close for comfort: Why banks and NBFCs will be hard to pull apart

2. FinBox and Capital Now partner to speed up digital onboarding

3. Of falling coconuts, peacock, elephant & stray dog nuisance: Insurers highlight Indian claims’ peculiarity

4. HDFC Bank seeks Singapore bank license to grow overseas

5. Government's cash surplus tops Rs 3.4 lakh crore

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter  here  and follow  FinBox on LinkedIn  to always get all updates.  

Cheers,

Mayank

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters