The Reserve Bank of India (RBI) said in a draft framework released on Monday that financial technology (fintech) firms should establish a self-regulatory organization (SRO) to ensure statutory and regulatory compliance.

According to the banking regulator, the organization will aim to tighten governance standards while also addressing the sector's demands and challenges.

The new framework comes at a time when the fintech industry is exploding due to increased demand for digital payments and borrowings. In September, RBI Governor Shaktikanta Das asked fintech companies to establish such a body.

"Achieving a healthy balance between facilitating innovation by the industry on the one hand, and meeting regulatory priorities in a manner that protects consumers and contains risk, on the other, is crucial to optimizing the contribution of the FinTech sector," the Reserve Bank of India (RBI) stated.

Self-regulation within the fintech sector is favored for reaching the right balance, according to the report.

"A proactive SRO should be able to persuade its members to support regulatory priorities." This would entail "facilitating communication between industry participants and regulatory bodies, advocating for necessary changes, and promoting a compliance culture," according to the RBI.

According to the draft regulations, the SRO would monitor adherence to industry standards and allow a clear communication line with the RBI.

The institution is also supposed to interact with the Reserve Bank of India when developing and revising the taxonomy for fintechs, as well as to carry out any activities allocated to it and provide information as ordered by the central bank.

The RBI can inspect the SRO's books or arrange for them to be audited. The SRO's board should establish a system for ongoing assessment of its directors' 'fit and proper' status. The central bank has requested feedback on the draft framework by the end of February, after which a final framework will be released.