RBI Circulars & Notifications – May 2025

The Reserve Bank of India (RBI) issued several significant updates in May 2025 covering new regulation-making processes, digital lending rules, foreign investment relaxations, penalties on banks, and economic capital framework revisions. These measures aim to enhance financial transparency, consumer protection, and economic stability while keeping pace with global best practices.

1. New Policy Framework for Formulation of Regulations

The RBI has introduced a standardised framework for creating regulations to ensure transparency, public consultation, and impact analysis.

Objective

To make RBI’s regulation-making process more accountable, inclusive, and evidence-based.

Key Features

• Public Consultation: Draft regulations will be uploaded on the RBI website along with details of their objectives, legal basis, and expected impact.
• Citizens will have at least 21 days to give their feedback.
• The final regulation will include RBI’s response to the public’s comments.
• Major changes after feedback may require the process to be repeated.
• RBI may also issue discussion papers for broader consultation.

Review of Existing Rules

RBI will regularly review older regulations to remove outdated provisions, align with global best practices, and avoid duplication.

Exemptions

This framework will not apply to:

• Internal administrative matters.
• Minor procedural changes.
• Regulations meant for specific entities.
• Urgent situations requiring confidentiality or quick action.

2. Relaxations for Foreign Portfolio Investors (FPIs) in Corporate Debt

Foreign Portfolio Investors (FPIs) investing via the General Route in corporate debt securities no longer need to comply with:

• Short-term investment limits.
• Concentration limits (cap on investment in a single corporate entity).

This change is expected to increase foreign investment inflow into India’s corporate bond market.

3. RBI Digital Lending Directions, 2025

The RBI has issued new digital lending rules to promote innovation while ensuring financial stability and borrower protection.

Why New Guidelines?

Concerns have emerged over:

• Over-reliance on third-party lending service providers (LSPs).
• Mis-selling of loan products.
• Data privacy breaches.
• Unfair recovery practices.
• Excessive interest rates.

Who is Covered?

• All Commercial Banks.
• All Primary (Urban) Co-operative Banks.
• State and Central Co-operative Banks.
• All NBFCs (including Housing Finance Companies).
• All All-India Financial Institutions.

Key Rules for Digital Lending

a) LSP Agreements & Monitoring

• Digital lending through LSPs must be backed by a formal contract.
• Lenders must check data privacy standards, past performance, and regulatory compliance of LSPs.
• Regular monitoring of LSPs is mandatory.

b) Customer Protection

• Credit checks must be done before loan sanction.
• No automatic credit limit increase without borrower consent.
• Borrowers must get all loan documents, terms & conditions, and privacy policy via SMS/email.
• Recovery agents’ details must be shared with borrowers before recovery attempts.

c) Loan Disbursement & Repayment

• Funds must be credited directly to the borrower’s bank account.
• Repayments must go to the lender’s account only.
• LSP service fees to be paid by lender, not borrower.
• Cash recoveries must be updated in borrower accounts on the same day.

d) Cooling-Off Period

• Borrowers can cancel loans without penalty within 1 day (minimum).
• Prepayment allowed after the cooling-off period as per RBI rules.

e) Data Privacy & Cybersecurity

• Consent-based data collection only.
• Borrowers can withdraw consent and request data deletion.
• Data must be stored in India.
• No biometric data to be stored.
• Compliance with RBI cybersecurity norms is mandatory.

f) Credit Reporting & Registration

• All loans, including deferred payment credit, must be reported to Credit Information Companies.
• All lending apps must be registered with RBI’s CIMS portal by June 15, 2025.

4. Other Major Announcements

Exim Bank’s $700 Million Line of Credit to Mongolia

India’s Exim Bank will provide a Government of India-backed loan to Mongolia for setting up a crude oil refinery.

Change in Bank Names

• North East Small Finance Bank Limited renamed as slice Small Finance Bank Limited.
• The Vishweshwar Sahakari Bank Ltd., Pune added to the RBI’s Second Schedule.

Reporting Changes for Investment Vehicles

Investment vehicles like AIFs, REITs, and InvITs can now issue partly paid units to non-residents. Reporting to RBI must be done within 30 days of issuance.

5. Monetary Penalties on Banks

The RBI imposed penalties on several banks for non-compliance with its directions:

• SBI: ₹1.72 crore.
• Jana Small Finance Bank: ₹1 crore.
• ICICI Bank: ₹97.8 lakh.
• Bank of Baroda: ₹61.4 lakh.
• Union Bank of India: ₹63.6 lakh.
• Axis Bank: ₹29.6 lakh.
• Yes Bank: ₹29.6 lakh.
• Deutsche Bank India: ₹50 lakh.
• IDBI Bank & Bank of Maharashtra: ₹31.8 lakh each.

These penalties reinforce RBI’s focus on compliance and consumer protection.

6. Revised Economic Capital Framework (ECF)

The ECF is RBI’s risk management tool to ensure it has enough capital to handle economic shocks.

Components

• Realized Equity (RE): Capital + Reserve Fund + Contingency Fund + Asset Development Fund.
• Revaluation Balances (RB): Unrealized gains from foreign currency, gold, and securities.

Key Changes in 2025

• RBI will maintain a Contingent Risk Buffer (CRB) of 4.5%–5.5% of its balance sheet for stability, credit, and operational risks.
• Market risk provisioning will be based on stress tests at 99.5% confidence level.

Clear surplus distribution policy:

1. If RBI’s reserves exceed the upper limit, full profit can go to the government.
2. If reserves are low, profits will be retained to build them up.