Why in the news?

  • The Finance Industry Development Council was granted Self-Regulatory Organisation status by the RBI to help ensure regulatory compliance in the Non-banking lending sector.

Self-Regulatory Organisations (SROs)

  • What is it?: A Self-Regulatory Organisation (SRO) is a non-governmental, industry-created body that sets and enforces rules and ethical standards for its members to ensure fair conduct, protect stakeholders, and promote professionalism.
  • Key Features:
    • Industry-Driven Regulation: Created by members of a particular sector to manage internal discipline and compliance.
    • Rule-Making Power: Formulates codes of conduct, operational norms, and grievance mechanisms for members.
    • Collaborative Governance: Works in consultation with the government, consumers, and other stakeholders.
    • Enforcement Mechanism: Operates through impartial processes- members accept disciplinary or penal actions for violations.
    • Public-Interest Focus: Goes beyond industry self-interest to safeguard workers, customers, and the ecosystem.
    • Government Oversight: Though private, SROs function under a degree of statutory regulation; some regulatory powers are delegated to them.
    • Watchdog Role: Acts as a deterrent to fraud, malpractice, or unethical practices in the sector.
    • Source of Authority: Their authority usually stems from industry consensus or contractual agreements rather than a direct statutory grant.
  • Examples in India:
    • Association of Mutual Funds in India (AMFI) – for mutual funds.
    • National Stock Exchange & BSE – act as SROs in the securities market under SEBI.
    • Institute of Chartered Accountants of India (ICAI) – regulates the accounting profession.
    • Advertising Standards Council of India (ASCI) – regulates advertising ethics.
  • Significance:
    • Promotes industry integrity and market efficiency.
    • Enhances regulatory flexibility and speed of decision-making.
    • Encourages responsible self-discipline and ethical awareness.
  • Challenges:
    • Risk of regulatory capture (favoring members’ interests).
    • Limited enforcement power without statutory backing.
    • Overlap or conflict with government regulators.
    • Transparency concerns if internal governance is weak.

Non-Banking Financial Companies(NBFC)

  • What is it?: A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 / 2013 engaged in the business of:
    • Loans and advances
    • Acquisition of shares, stocks, bonds, debentures, or government securities
    • Leasing, hire-purchase, insurance, or chit fund business
  • Functions:
    • Provide credit to individuals, MSMEs, infrastructure, housing, and rural sectors.
    • Offer financial services such as leasing, hire purchase, investment, and microfinance.
    • Facilitate financial inclusion and complement the formal banking system.
    • Provide advisory services and wealth management (in select categories).
  • Major Restrictions:
    • Cannot accept deposits for <12 months or >60 months.
    • Cannot issue cheques on themselves (not part of payment system).
    • No Deposit Insurance under DICGC (unlike banks).
    • Not subject to CRR/SLR requirements.
    • Operate under lighter regulatory norms compared to banks.
  • Regulations:
    • Reserve Bank of India (RBI): Issues licenses, regulates operations, supervises prudential norms.
    • Ministry of Corporate Affairs (MCA): Governs incorporation and company law matters.