RBI tightens customer protection, eases NBFC norms and boosts MSME credit access

The Reserve Bank of India (RBI) on Friday announced a wide-ranging set of regulatory and supervisory measures aimed at strengthening customer protection, improving digital payment safety, curbing mis-selling of financial products, and easing compliance for select financial institutions. The announcements were made by RBI Governor Sanjay Malhotra following the Monetary Policy Committee (MPC) meeting held between February 4 and 6, in which the policy repo rate was kept unchanged at 5.25%.

Customer protection

As part of a renewed focus on consumer safeguards, the RBI said it will issue three draft guidelines to address key areas of concern in retail finance. These will cover mis-selling of financial products, recovery of loans and engagement of recovery agents, and limiting customer liability in unauthorised electronic banking transactions.

In a significant move, the central bank also proposed a framework to compensate customers for losses arising from small-value fraudulent transactions, with compensation capped at Rs 25,000 per customer. The RBI further announced that it will release a discussion paper on enhancing the safety of digital payments. Proposed measures under consideration include lagged credit mechanisms and additional authentication requirements for certain user segments, particularly senior citizens, to reduce the risk of fraud.

Bhavin Patel, Co-Founder & CEO, LenDenClub & Vartis Platforms, said: "The RBI’s proposed guidelines on preventing misselling, ensuring fair and transparent recovery practices, and clearly defining limited liability in unauthorised electronic transactions create greater accountability across the lending ecosystem. Similarly, the proposed compensation for losses arising from small-value fraudulent transactions acts as both a deterrent against misuse and a meaningful safety net for customers who become victims of fraud. At a time when digital adoption is accelerating alongside fraud risks, these measures help reduce fear, encourage timely reporting, and ensure that customers are not penalised for circumstances beyond their control. For users, this translates into greater confidence, safety, and clarity, and for the industry, it strengthens trust and responsible participation in digital and P2P lending.” 

Financial inclusion

The RBI has undertaken a comprehensive review of key financial inclusion frameworks, including the Lead Bank Scheme (LBS), the Kisan Credit Card (KCC) Scheme, and the Business Correspondent (BC) Model. Draft revised guidelines for these schemes will be issued to improve effectiveness and delivery.

To strengthen monitoring and data management under the Lead Bank Scheme, the RBI will also launch a unified reporting portal. Among other inclusion-focused measures, the central bank announced an increase in the limit for collateral-free loans to micro, small and medium enterprises (MSMEs) from ₹10 lakh to ₹20 lakh. Banks will also be allowed to lend to Real Estate Investment Trusts (REITs), subject to specified prudential safeguards, to support financing in the real estate sector.

Urban Cooperative Banks

To bolster the resilience of Urban Cooperative Banks (UCBs), the RBI unveiled four measures. These include raising financial limits on unsecured loans and loans to nominal members. In addition, the RBI proposed removing tenor and moratorium-related restrictions on housing loans extended by Tier III and Tier IV UCBs.

To improve governance and operational capacity, the central bank will launch Mission-SAKSHAM (Sahakari Bank Kshamta Nirman), a capacity-building initiative aimed at training more than 1.4 lakh personnel associated with UCBs.

Easing compliance for NBFCs

In a move to improve ease of doing business, the RBI announced regulatory relaxations for Non-Banking Financial Companies (NBFCs). NBFCs that do not accept public funds, have no customer interface, and have asset sizes below ₹1,000 crore will be exempted from registration requirements. The RBI also proposed removing the need for certain NBFCs to seek prior approval before opening more than 1,000 branches.

Financial market reforms

On the market side, the RBI removed the Rs 2.5 lakh crore investment cap under the Voluntary Retention Route (VRR), while retaining existing investment limits under the General Route. In line with the Union Budget 2026–27, the RBI will issue a regulatory framework for derivatives on corporate bond indices and total return swaps on corporate bonds.

The central bank will also issue draft revised guidelines for Authorised Dealer banks and stand-alone primary dealers to provide greater flexibility in foreign exchange transactions. Governor Malhotra added that draft regulations on External Commercial Borrowings have been finalised and will be notified shortly.

Kunal Shah, Co-founder, SURE, said: “The RBI’s decision to keep the repo rate unchanged at 5.25% as the MPC committee believes that the outlook on growth and inflation are positive. Successful completion of trade deal with US augurs well for growth and the outlook on inflation is closer to 4% target.  RBI has infused approximately Rs 13.70 lakh crores of liquidity in the banking system in current financial year (including dividend of Rs 2.70 lakh crores), apart from the this interest rates are reduced by 1.25%. The status quo will allow the economy to absorb the monetary changes introduced over the course of the last financial year. From a lending perspective, having maintained a neutral stance provides more certainty to both banks and borrowers on the earlier repo rate cuts. For borrowers, this stability means interest rates are less likely to see sudden movement. Existing borrowers will see more stable monthly outgo, while new buyers are better positioned to plan their home purchases with confidence, aided by predictable EMIs and stable rates improved affordability driven by prior easing.”